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Round-tripping, speculations behind naira depreciation – FDC

By Babajide Komolafe

Round-tripping of foreign exchange from the official market to the parallel market as well as activities of speculators are some of the factors behind the recent depreciation of the naira says Financial Derivatives Company.

Meanwhile, cost of funds rose sharply in the interbank money market due scarcity of funds which intensified during the week.

According to Kakawa Discount House weekly interbank newsletter, the market ended with deficit of N78.21 billion, down from N32.94 billion the previous week. The scarcity of funds was aggravated by N94.475 billion withdrawal to fund foreign exchange purchase at the bi-weekly official foreign exchange auction.

The impact of this further drop in market liquidity is reflected in the data from Financial Market Dealers Association of Nigeria (FMDA), which showed that interest rate on Call lending, 7-Days and 30-Days lending rose by 83 basis points.

Interest rate on Call lending closed at 15.79 per cent, up from 14.88 per cent on Monday, while 7-Days and 30-Days lending closed at 16.04 and 16.25 per cent from 15.21 and 15.58 per cent respectively.

In the foreign exchange market, the naira further weakened at both the interbank and official segment of the market. At the official market, the naira depreciated by six kobo as the official exchange rate rose to N155.9 from N155.84 per dollar. The naira depreciated by 26.25 kobo as the interbank rate rose to N163.21 from N162.95 per dollar.

Since May 26th the naira depreciated persistently at the bi-weekly auction as the exchange rate rose steadily from N155.69 per dollar to N155.9 per dollar on Monday. Similarly, the naira depreciated by 386 kobo as the interbank rate rose to N163.21 per dollar last week from N159.35 per dollar on May 23rd.

The Financial Derivatives Company explained the factors driving the depreciation of the naira in its monthly economic publication for June. It said, “ We believe that the weakening of the Naira includes a combination of several factors: Multinationals who have declared dividends have increased their demand for forex for the purpose of repatriating earnings;

Speculators besieging the market to take positions, due to their expectation of a weaker currency as a result of the declining trend in oil prices; i.e. lower oil prices will result in a slowdown in external reserves accretion and the ability of the CBN to continue its support of the Naira;

The divestment of international investors’ funds from high yield government securities is increasing the demand for forex;  Round-tripping between the official and parallel market. The spread between parallel and official rates has widened to levels last seen in December 2009 and early January 2010. The gap between the official spot rate and the parallel cash rate is currently N9.1, from a low of N2.94 in March.

The recent Monetary Policy Report (MPR) clearly evidences the fact that the CBN is seriously concerned about the risk of a potential depreciation in the Naira, as a result of the recent developments in the international commodity and financial markets.

This concern is understandable as the Nigerian economy is heavily de-pendent on oil, the possibility of a softening in crude oil prices with potential fiscal revenue losses could lead to renewed pres-sure on the exchange rate.

If the weakening in the Naira persists, which we expect, then the nation’s forex reserves could deplete even faster than the CBN anticipates. The market would likely see such depletion as a sign of weakness which could lead to a further increase in currency speculation.”


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