July

Was devaluation of the naira the solution to the problem?

abokiFX believes the problem had always been liquidity and still is liquidity.

CBN gave us false impressions last month that they would intervene by supplying dollars to help regulate the exchange rate as the need arose.

CBN flooded the market with liquidity at the end of June making us believe this was the new trend with the new Free Floating exchane rate.

Nigeria has no other major source of FX inflow other than Crude oil export, of which CBN controls the proceeds.

It would be quite difficult for the interbank market or the parallel market to meet any severe liquidity with CBN’s absence.

Small wonder why the naira is then back to where it was when CBN used a fixed rate exchange mechanism.

Below is a table showing the rate differences and charts showing how different platforms have reacted to the floating exchange.

It all shows that unless CBN pumps in the desired liquidity to absorb the market demand, the naira will only float freely away to new highs on a daily basis.

table

chart 1

Chart 2

chart 3

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JULY UPDATE – 2016 ………………………………………………..09/07/16

EXPECT NAIRA TO APPRECIATE IN JULY
TARGET PRICE RANGE: N350 : $1 AND N450 : £1 AND N370 : €1

RESERVES

 

In June, CBN removed the peg from the dollar by introducing a free floating exchange rate thereby devaluing the naira by 40% against the dollar in the global market and made naira appreciate in the parallel market. For July, abokiFX expects the following factors to impact the naira positively helping the naira appreciate in the parallel market against the three major currencies:

1. CRUDE OIL PRICE AND VOLUMEThe price of Brent crude oil now hovers around at $50 per barrel, generating a $12 surplus for the Federal Government. The volume has slipped below 1.6 billion barrels but still within tolerance to generate steady revenue for Nigeria. This is evident in the gradual recovery of the foreign reserve ( please see graph). AbokiFX research believe this should boost CBN’s confidence to supply additional revenue to the market should the demand for FX intensify. This should make naira appreciate.

2. BREXIT TURMOIL – AbokiFX believes the Brexit outcome has weakened the Pound, which should make Naira appreciate against GBP, EUR and slightly against USD.

3. CBN INTERVENTION – CBN last month intervened by supplying large volumes on USD to meet demand. This had a positive impact in the market. AbokiFX expects CBN to replicate this act in July, as CBN has offered to intervene in any excess demand by releasing enough dollars in to the market. This has also reduced the pressure on CBN because the dollar volume supplied will be 40% lighter, in line with the 40% depreciation of the naira.

4. SPECULATORS – Speculators are expected to mop up existing FX in the parallel market but abokiFX believes CBN is willing to supply enough FX to keep the rates regulated and at comfortable levels. This should help the naira appreciate in July.

5. CAPITAL INFLOWS – Foreign inflows are gradually creeping back into the country. This is a good sign as the outflows experienced earlier in the year has now slowed down with recovery signs. AbokiFX believes these inflows will support any pressures experienced in the parallel market which should help the naira gain in July.

6. FOREIGN RESERVES – Crude oil now hovers around $50 a barrel which has helped the foreign reserve recover from its dwindling position. This should boost the reserves and how much CBN is willing to inject into the interbank market.

7. HOLIDAYS AND PRE-SUMMER BOOKINGS – Months of July and August are high demand months for families going on holidays abroad but with the inflation in the economy and the devaluation of the naira. AbokiFX believes demand for FX would be curtailed by families in July hence, reducing pressures on the naira.

8. LIQUIDITY IN THE SYSTEM – AbokiFX expects the mopping up of the naira by CBN through monetary to reduce the demand for FX as one of the factors for high FX demand in previous months has been excess liquidity. July is expected to see move CBN daily intervention of dollar supply to curb spiralling FX prices.

9. PURCHASING POWER WEAKENED – Introduction of devaluation usually weakens purchasing power parity. AbokiFX believes the devalued naira and hike in prices including airfares has weakened the purchasing power of individuals and expect this to be reflected in the lower demand for FX in the parallel market.

10. INCREASE IN FX ALLOCATION – There are reports that CBN has increased its allocations to manufacturers and fuel importers. This should help subdue the demand for FX in the parallel markets in July.

Unless the Dollar / Pound / Euro gain excessively in the international markets or unless CBN refuses to boost supply of FX into the  FX market, rates should be in the range predicted above for the month of July………………..09/07/16