AUGUST UPDATE – 2016 ………………………………………………..11/08/16

TARGET PRICE RANGE: N380 : $1 AND N480 : £1 AND N390 : €1

July saw the Naira depreciate heavily against our forecast of an appreciation in value, as CBN decided to sit back and test how long the naira could stretch. Occasionally, CBN injected some funds to save the Naira from an embarrassing rate of N350 to $1 but this had little impact on the depth of the crash. CBN had earlier given the market the impression that the required liquidity would be provided to the market whenever it was needed.

In August, AbokiFX research team has put together, factors they believe would impact the naira positively, helping it appreciate in the parallel market against the 3 major currencies:

1. CRUDE OIL PRICE AND VOLUME: The price of Brent Crude oil has lowered to an average of $45 per barrel this month and seems it will maintain this price range for the rest of August. This is above the $38 per barrel benchmark budget hence, should cover the loss in volume from disruptions in the Niger Delta region. This should help maintain a decent revenue for August and encourage CBN to increase its intervention fund. If this happens, abokiFX believes the FX market will witness improved liquidity in dollars which should help the naira appreciate.

2. INTERNATIONAL CURRENCY MARKET: International major currencies like the GB pound (GBP), US dollar (USD) and Euro (EUR) have weakened heavily, especially the pound. This has helped naira maintain stability in the international market. This means the naira is trading better than expected against these currencies which helps improve how much revenue CBN receives from crude oil sales. AbokiFX believes this should take the pressure off the naira in August and improvements should be seen in the parallel market as naira appreciates.

3. BDC ALLOCATION: CBN has requested banks to supply all BDCs $30,000 on a weekly basis. AbokiFX believes this should massively boost the supply of dollars in the parallel market. Dealers have for a while had to source their own dollars off the parallel market. This will continue with an additional $30,000 weekly. Still not enough to meet the market demand, the fact that additional $30,000 will be turned over weekly, will encourage rate competition in the market, forcing the rates down which should help the naira appreciate.

4. SUMMER HOLIDAY AND OLYMPIC DEMAND WANES: As the summer holiday gradually draws to an end. Less demand for FX is expected here. Same goes for any demand for dollars for the Rio Olympics. AbokiFX expects naira to appreciate as returnees from holidays generate FX inflow to stimulate the market. This will create additional supply which should help the naira appreciate.

5. OTC SPOT FX: OTC (Over The Counter) trades introduced in June, is expected to help ease the pressure on interbank trades. The market is now getting to grips with the trading system as equilibrium has been reached, putting the rates at an acceptable N320 to the dollar which the market is comfortable with. AbokiFX believes CBN is willing to intervene should rates exceed the N320 mark drastically as they have recently intervened when the rate hit N350 to $1. Though the supply of FX is still thin in this market segment, traders are willing to place orders here than pay a 22% premium in the parallel market. This takes the pressure off the parallel market gradually boosting the value of the naira in the system.

6. CBN INTERVENTION: The FX market is gradually adjusting to life without continuous CBN interventions. This means only genuine FX bidders are willing to bid at premium of N320 in the OTC spot market and N390 to $1 at the parallel market. This gradually keeps speculators at bay. The risk is the timing of the CBN intervention as this can either improve the naira or depress the naira further. AbokiFX believes CBN is strategically intervening to help the naira maintain a certain rate in the market. How else would one explain the naira peaking at N400 to $1 and cooling off.

7. CBN MOPPING LIQUIDITY: CBN is still mopping up liquidity with its monetary instruments such as FG Bonds and T-bill’s. With higher returns envisaged, naira is now being diverted into these investments which promise guaranteed returns and stability than the volatile FX market. AbokiFX believes though no liquidity is created in the market here, it will help reduce the demand for FX in the parallel market and help the naira appreciate.

8. HIGHER INTEREST RATES: CBN increased its MPR (Monetary Policy Rate) to 14% which means returns on investment tools such as bonds and savings will be higher. This is expected to lure in foreign investors and encourage FX liquidity boost in the parallel market and interbank markets. AbokiFX believes this should boost the naira value in August.

9. PARALLEL MARKET VOLATILITY: AbokiFX believes the volatility in the parallel market has discouraged speculators, with surprise intervention by CBN no longer predictable, traders are not willing to trade above rates seen before the introduction of the floating exchange rate. This shows FX rates will only come down in August rather than test new highs as a rate ceiling is now being observed in the parallel market.

10. FOREIGN RESERVES: As at today, the foreign reserve stands at $25.9bn. CBN is gradually depleting reserves to meet FX demands. AbokiFX believes this is possible because CBN is comfortable with the rise in crude oil price though supply has dropped considerably. AbokiFX believes this confidence displayed by CBN should help the naira appreciate as CBN uses the reserves to stimulate the FX market.

11. FX TRANSFER REMITTANCES: CBN has directed remittances from the 3 major FX transfer companies registered in Nigeria to lodge their dollar remittances in Nigeria to increase capital inflows. Should this happen, more FX would be available for sale to the parallel market and interbank markets. This will definitely help the naira appreciate.

Unless the Dollar / Pound / Euro gain excessively in the international markets or unless CBN refuses to boost supply of FX into the FX market or unless the $30,000 is not allocated to BDCs weekly in August, rates should be in the range predicted above for the month of August………………..11/08/16