18 June 2016, Lagos – The naira firmed at the parallel market on Friday, while stocks posted their biggest weekly rally in 14 months as domestic funds snapped up shares following the Central Bank of Nigeria’s currency reforms designed to attract foreign investors, traders said.
The CBN has said it will let the market set the exchange rate freely effective from Monday, abandoning a 16-month policy of pegging the currency at 197 to the dollar, harming investment and causing the economy to contract.
The naira traded at 345 at the black market on Friday, up 2.8 per cent, two days after the central bank’s announcement of the currency reforms, Reuters reported.
A Reuters poll found that analysts expect that when the naira floats freely on Monday it will trade at 275 to 300 per dollar.
“The success of the new exchange rate regime will ultimately depend on how effective it is in attracting more foreign investment and getting pockets of dollars hoarded on the domestic front back into the market place,” an economist at NKC Economists, Cobus de Hart, said.
In the non-deliverable forward markets, the one-month contract, gained 3.45 per cent to equal the record high of N300 per dollar hit the previous day.
Stock traders said domestic investors were buying shares at cheap valuations, hoping that a more liberal currency market and the recent stock-market rally would draw foreign investors, who have avoided Nigeria due to the risk of a currency devaluation.
The stock market, which has the second-biggest weighting after Kuwait on the MSCI frontier market index, climbed for the third straight day on Friday, to close 2.66 per cent higher at 29,247 points.
Stocks rose 7.4 per cent this week.
But worries over where the naira will start trading on Monday and how an estimated $4bn backlog of demand in the currency market will be cleared, still persist, analysts say.
Bank chiefs and treasurers met the CBN officials on Friday to discuss trading on Monday.
The CBN on Friday sold long-dated treasury bills at higher yields than in the secondary market to mop up naira liquidity before the start of next week’s open market currency trading, to curb speculation.
It mopped up N205.9bn ($1.03bn) worth of one-year bills at a price yielding 15.6 per cent, the same level as inflation, which was running above a six-year high as of May.
Secondary market bills were trading at 10.81 per cent on Friday, traders said.
“Foreign investors will need to be convinced that the new FX regime is sustainable in the medium-term and will likely also require higher yields before resuming the purchase of local debt,” the Head of Africa Strategy at Standard Chartered Bank, Samir Gadio, said.