Market Panic – aboki says……………………………………………24/02/16
WHY THE PANIC WHEN THESE FACTORS PERSIST
Naira has not gained
The price correction seen in the market in the last three days is not because the naira has appreciated. The naira has only stabilised and the three key currencies slumped. Please see “Market News” section on the slump in the Pound Sterling and Euro and some Dollar wobbles. The crude oil we export has not appreciated in price rather, it has stayed within a range to sustain steady revenue and maintain CBNs weekly dollar supply.
Naira Non – Devaluation
As President Buhari reiterated he would not devalue the Naira, those who had bought and held on to the dollar and other FX currencies to make quick returns in the event of a devaluation, have off loaded their funds in the market causing over supply. This has led to the next bullet point – Speculators panic.
The speculators, who have contributed to increased demand for forex, have panicked based on President Buhari’s announcement and other global market news. Not sure how long to hold on for or even if it’s worth holding on to the accumulated forex, have panicked and started off loading their funds as fast as possible especially before the CBN intervention fund hits the market this Thursday causing additional supply. This is influenced by the next bullet point – Brexit panic.
The news that Britain could leave the EU has caused global panic causing the Pound and the Euro to slump heavily. This panic has translated to the Nigerian market with speculators and holders of the currencies offloading as fast as possible. Expect this scenario in June 2016 when Britain holds a referendum on Brexit. This is driving the next bullet point –BDC and Black Market Panic
BDC and Black Market Panic
The BDC operators and Black Market traders are now in a panic state that they are refusing to trade the FX. Those that are willing to buy are using a “Margin of Safety” by asking to buy at a very low rate (as low as N220 to $1) and offering to sell at a much higher rate of $310 to $1. This is influenced by the next bullet point – CBN Intervention Fund.
CBN Intervention Fund
The CBN Intervention fund is coming in this Thursday. The CBN rate on abokiFX website shows a steady decline. This means CBN will supply dollars to banks at this lower rate tomorrow compared to the market. As no further speculation in the market, total market demand falls, leading to oversupply and price correction. This has created the position in the next bullet point – Market Equilibrium reached
Market Equilibrium reached
The importers demanding naira have reduced as the market reaches an equilibrium of demand and supply. Without the further speculation, the prices are gradually correcting themselves. This helps to understand the correction in the next bullet point – Low Crude Oil
Low Crude Oil
Crude oil prices are still hovering around $30 – $35 dollars which means the Naira is able to stabilise on this prices rather than appreciate. This means the Excess Crude account will be stabilised to ensure CBN can still supply some Naira without depleting its reserves but CBN cannot increase its supply to meet market demand at this stage. This leads us to our concludion in the next bullet point – Conclusion
As the noise settles, expect demand for FX to gradually increase and gradually drive up rates again though not to the speculative levels we have recently witnessed.
FEBRUARY UPDATE – 2016
EXPECT NAIRA TO DEPRECIATE AGAINST DOLLAR AND POUND
TARGET PRICE RANGE: N300 : $1 AND N420 : £1 AND N320 : 1 EURO
The factors of DEMAND and SUPPLY are now defining an equilibrium for the exchange rates since BDC’s have been handicapped by the CBN. Other factors that will drive down the value of the Naira this month include:
- N35m BDC REFUND – CBN will refund the N35m BDC deposit. This will allow the BDCs more cash to aquire more forex to trade with thereby pushing prices slightly up once the money is released but will regulate downwards shortly after.
- CRUDE OIL PRICE – The crude oil price is hovering around $35 a barrel. As long as Nigeria’s output is maintained, the government should be able to build some reserves. This will help increase the intervention fund from CBN which should stabilize the dollar supply in the market.
- OPEC CUTS – Should OPEC agree to a cut in output, this should push up crude prices and also aid the increase in the intervention fund.
- SPECULTORS – Devaluation of the Naira is still expected so speculators will keep demanding forex to take speculative positions. This will drive down the value of the Naira further.
- BANK TRANSFER – Banks now offer to foreign fund transfer services. People still need to supply their own foreign currencies to the banks. This will also keep demand up as banks do not have enough dollars to meet customer demands.
- WEAK STOCK MARKET – The Nigerian Stock Market is still very weak. Trading the three key currencies in the black market is seen as an alternative investment in the short term to the stock market. People are still channeling funds to speculate on forex movements. This too will drive the Naira down.
Unless the Dollar / Pound / Euro gain excessively in the international markets, rates should be in the range predicted above for the month of December……………………..07/02/16