MONEY MARKET: As Forex Liquidity Wanes To 21-month Low

Liquidity pressures at the foreign exchange market persisted with inflows into the Investors and Exporters window (I&E) dipping significantly by 65.7 per cent month on month in July as foreign investors remain cautious.

Data from the FMDQ showed that foreign exchange inflows into the I&E end of the market declined from $1.77 billion which was recorded in June to $608.00 million in July, the lowest level since April 2021, when an inflow of $564.20 million was recorded.

Similarly, week on week, activity level at the I&E window had declined 10.1 per cent to $389.1 million last week, with the FMDQ Securities Exchange FX Contract Market stalling as the total value of open contracts stagnated at $6.3 billion.

According to traders, the stall was due to the Central bank of Nigeria(CBN) decision to temporarily deactivate all contracts with durations ranging from one to twelve months as part of its ongoing reforms. Last month data showed that inflows from both the local and foreign investors had declined.

Precisely, inflows from local investors dipped by 60.6 per cent month on month to $561.00 million in July as against $1.42 billion recorded in June.

Inflows from the CBN had declined by 70 per cent while non-bank corporates and exporters’ inflow had declined by 65.6 and 63.9 per cents respectively. Similarly, inflows from individuals had dropped by 51.2 per cent in July.

Inflows from foreign sources remained underwhelming, decelerating by 86.5 per cent to $47 million in July as foreign investors remained cautious about returning in their droves despite the foreign exchange market liberalisation, as forex backlogs remain uncleared.

Value of the naira at the parallel and official windows moved in opposite directions last week with the local currency recording depreciation at the unofficial market while it firmed at the I&E window. The naira depreciated against the US dollar at the parallel market, sliding by N14 or 1.61 per cent week-on-week to N881 per dollar from N867 the previous week. Traders attributed to the persistent dollar shortage and speculative activities, while manufacturers and importers continued to seek easier access and availability of dollars.

In contrast, at the investors’ and exporters’ forex window, the naira strengthened against the US dollar for the third consecutive week, gaining N32.60 week-on-week to close at N743.07 to the dollar from N775.94 per dollar which it closed in the previous week. Despite the growing demand for the dollar, the naira showed resilience in this segment.

At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the naira weakened against the US dollar across all forward contract tenors. The rates declined by -2.88, -3.10, -3.40, -4.07, and -1.84 per cents for the 1-month, 2-months, 3- month, 6-month, and 12-month contracts, respectively. The demand pressure persisted across the market, leading to these changes.

Meanwhile, after 10 consecutive weeks of decline, the 30 days moving average of Nigeria’s foreign reserves increased by $13.14 million week on week to $33.97 billion as at August 2, 2023.

The reserves had been positively impacted by rising global oil prices. On a weekly basis, the price of Brent crude oil saw a 2.5 per cent improvement, reaching $86.17/bbl, in response to Saudi Arabia’s announcement to extend its daily production cut of 1 million barrels through September.

Oil futures prices rose last week due to concerns about tight global supplies and disruptions in oil production in Libya. Oil prices closed at a weekly high of $86.24 per barrel, the highest level since June 2022. Similarly, the price of Bonny Light crude exhibited an upward trend, increasing by 1.13 per cent week-on-week to close at $89.71 per barrel from $88.71 per barrel in the previous week.

Looking ahead, traders and analysts say they expect forex

liquidity conditions to remain frail in the near term, amid the lingering reforms in the forex market.

Analysts at Cordros Research say they “anticipate weak foreign inflows in the short term, as foreign investors will likely adopt a wait-and-see approach in the near term as they await the CBN’s actions in clearing its FX backlogs and the direction of short-term interest rates amid high inflation.”

Whilst noting that the Nigerian foreign exchange market continues to face challenges with the naira’s depreciation against the greenback even as the oil market continues to show buoyancy with prices rising on global supply concerns, analysts at Cowry Assets Management say they anticipate the naira to trade in a relatively calm band across the forex markets barring any market distortions that may disrupt supply