Naira Rises To Record High As CBN Removes Cap To Allow Volatility, Attract Supply Of Forex

Naira forwards rose to record highs and volatility surged after the Central Bank of Nigeria ended a rule capping the difference, or spread, between bids and offers in the foreign-exchange interbank market at 50 kobo, to allow liquidity levels determine the value of the naira as a way of increasing supply to the market.
The CBN removal of the limit on bid-offer spreads in the foreign-exchange market, raising expectations the currency is set to extend declines as it trades more freely. Three month non-deliverable forward contracts jumped 4.3 percent to a record N329.5 per dollar, while contracts maturing in a year rose 4.3 percent to N366.5, also the highest level on a closing basis. One-week historical volatility increased to 26 percent, compared to an average of 8.6 percent over the past year, according to data compiled by Bloomberg.
While the naira weakened 1.1 percent to M287.5 versus the dollar in the spot market, having swung between N280.22 and N293.38, little trading took place, according to David Willacy, a currency trader at INTL FCStone Limited..
The value of the naira had began to depreciate last week declining to N292 to the dollar due to liquidity issues. According to Olakunle Ezun, an analyst at Ecobank Transnational, the N280 range of the naira was not a true reflection of the liquidity status of the market.
Ezun who noted that the removal of the cap had resulted in the volatile experienced by the market. “The spread used to make prices move within a defined range, which is not good. The expectation is that central bank will allow the market to trade freely by removing the spread and letting liquidity determine the rate.”
The naira depreciated 29 percent against the dollar last month after the CBN ended a 16-month peg of N197 per dollar. That and the capital controls used to defend it led bond and stock investors to flee the country and exacerbated an economic crash caused by the fall in oil prices from mid-2014. The economy contracted in the first quarter and is likely to shrink over the whole of 2016, the International Monetary Fund said last week.
Few investors have returned to Nigeria’s markets since the devaluation and many think the exchange rate needs to weaken further to reflect is true value. Importers of items such as glass, textiles and rice are still banned from using the interbank market to buy hard currency and are forced on to the black market, where the naira trades has declined to N365 per dollar.

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