13 November 2014, Lagos – The Central Bank of Nigeria, CBN, yesterday allowed the Naira to suffer its biggest official depreciation since November 2011, as the currency depreciated by 54 kobo at the official foreign exchange market.
This followed the continued decline in the nation’s external reserve, as the foreign exchange market defied all efforts of the apex bank to curtail foreign exchange demand and restore confidence in its ability to defend the Naira.
At the Bi-weekly Retail Dutch Auction System, RDAS, session conducted yesterday by the CBN, the official exchange rate rose to N156.39 to the dollar from N155.85 at the previous session conducted on Monday. This translated to 54 kobo depreciation of the Naira against the dollar, and the largest in three years.
Until last month the CBN had fiercely defended the Naira, maintaining the official exchange rate at the N155.75 since April 2013. But following increasing decline in the nation’s external reserves, rising demand for foreign exchange occasioned by foreign investors divesting from the country in response to decline in price of crude oil, the apex bank started depreciating the Naira at the official exchange market.
On October 15th, it depreciated the Naira by one kobo, and by two kobo on the 3rd and 5th of November. On Monday, November 10th, the CBN allowed the Naira to depreciate by five kobo and then yesterday by 54 kobo. The last time the CBN allowed the naira to depreciate more than 50 kobo at the official market was on 28th of November 2011.
But at the interbank foreign exchange market yesterday, the CBN intervened to halt the depreciation of the Naira, with the interbank exchange rate rising to N168.6 to the dollar on Tuesday from N165.8 last Friday. To halt this trend, the CBN conducted special dollar sales to banks, which caused the interbank exchange rate to fall to N167.6 to the dollar yesterday translating to N1 appreciation for the Naira.
Meanwhile, experts have predicted further depreciation for the Naira, saying a sharp devaluation is inevitable. “The markets are starting to see the blood here,” said Emad Mostaque at Eclectic Strategy, a consultancy set up by former Deutsche Bank veteran, John-Paul Smith.
“We are now entering a particularly dangerous period for the Naira as time constraints and low resources to fight against speculative attack make the currency vulnerable,” he said. “Everything is lining up for that currency attack.”
There is in theory very little ammunition to defend the Naira. Data from the Central Bank showed its liquid reserves have declined since the start of the year by $5.77 billion or more than 15 percent to $36.69 billion by Tuesday.
Despite three interventions this week, the Naira closed at N167.60 to the dollar on Wednesday, well above the central bank’s trade band of 150-160 – a range it burst out of in May and which appears to have become merely cosmetic.
Non-deliverable currency forwards – short-term contracts used by counterparties to lock in a future exchange rate – indicate a naira-dollar exchange rate of 176 in three months, a roughly 5 percent depreciation. Over 12 months time, forwards show the naira at 200.
A speculator attack may not necessarily materialise – analysts point out that in a relatively small market it would be technically difficult to “short” the naira on a huge scale. But investors believe a fall triggered by an exodus of foreigners and locals from financial markets and banks is likely.
Bank of America Merrill Lynch analyst Oyin Anubi said his clients – U.S. equity investors – feared that as sinking oil prices deplete Nigeria’s war chest, a sharp correction is ahead: “Naira devaluation is fast becoming consensus,” he wrote in a note.