June

LAGOS  –   Friday Afternoon

By abokiFX

The parallel market traders are holding back on their FX trades as the streets of Lagos panic at what the new FX policy will bring in next Monday.

Traders have refused to buy USD / GBP / EUR and those willing to buy off customers are buying low volumes at much lower rates, to hedge against any price fluctuation expected next week.

While some traders are willing to sell at a lower price than yesterday’s close, most have declined to take on additional forex and some refused to sell that which they hold, in case the market reverses.

With various speculations on what price CBN will trade at next week, the market is now in panic mode and traders are gradually reducing trading act ivies till next week.

CBN’s weekly intervention fund that hits the market on Thursdays was held back yesterday which created further panic, as there now is no official guide to the rate setting in the parallel market.

Wide spreads are beginning to emerge in locations where traders are willing to trade and abokiFX believes this will persist all through the weekend.

AbokiFX believes new market rates will be introduced next week once CBN opens its single currency market trade but the volume of FX that CBN will trade on the day, will also be a key driver of the new market rates we expect to see.

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JUNE UPDATE – 2016 ………………………………………………..06/06/16

EXPECT NAIRA TO DEPRECIATE FURTHER IN JUNE
TARGET PRICE RANGE: N360 : $1 AND N520 : £1 AND N400 : €1

The FX market moved into volatile status in May when CBN announced its intentions to introduce a flexible exchange rate system. For June, abokiFX expects the following factors to impact the Naira negatively thereby, forcing the Naira to depreciate further against the three major currencies:

  1. CRUDE OIL PRICE AND VOLUME– The price of Brent crude oil now sits comfortably at $50 per barrel generating a $12 surplus for the Federal Government. The only problem with this is, what we have gained in value, we have lost twice as much in volume. The daily volume budget of 2.2million barrels a has been cut to 1.6 million because of the Niger Delta unrest and it’s still declining. This will make it difficult for CBN to replenish its foreign reserves and defend the naira.
  1. BUDGET RELEASEAbokiFX believes the budget sign off last month will create additional pressure on the Naira as projects get on the way for execution. Demand for USD will increase as contractors start to procure necessary project materials and services. This will gradually make the rates more volatile in June as contracts get initiated and funds disbursed source for FX. 
  1. FLEXIBLE FX GUIDANCECBN last month announced it would introduce flexible exchange rates into the market. This has added to the confusion as no guidance has been issued. AbokiFX believes we already have a semi flexible rate as CBN currently sells rates to banks at N197 to $1 and N285 to $1 to oil marketers. The volume of demand still cannot be met by CBN as it has to maintain a reserve ratio hence, oil marketers flood the parallel market to source additional FX. The daunting task ahead is how CBN will issue guidance on the flexible fx rates and implement the rates all within the next three weeks. AbokiFX believes this poses a risk to the volatility of the Naira and will add depreciating pressures in June.
  1. FUEL DEREGULATIONAbokiFX believes the deregulation policy introduced in May has ushered in a new set of active players in the parallel market as marketers now create additional demand for FX to cover the shortfall from CBN. AbokiFX believe the impact of this will be felt more in June as CBN shrinks its allocation of dollars further, to preserve the foreign reserve. This too will increase the pressure on the Naira. 
  1. SPECULATORS AbokiFX believes speculators though quiet, are still actively taking position in the market, gradually building up a buffer in anticipation of an official deregulation by CBN this June, to coincide with the issuance of the flexible FX guidance. AbokiFX expects to see some sharp volatility in rates as well as wider margins as speculations increase from mid-June. 
  1. REDUCED CAPITAL INFLOWS– The capital inflows in May reduced, meaning we are getting less Foreign Direct investments (FDIs). AbokiFX believes even the parallel market is struggling to meet market demands on a weekly basis as less foreign exchange is brought into the country.  The less FX that comes in, the less the parallel market has to offer. AbokiFX says this is a major pressure point in the market which will tilt the Naira further down against the three major currencies.
  1. FOREIGN RESERVES NOW BELOW 6 MONTH COVER – AbokiFX research team observed that the foreign reserve is now below the recommended 6 month cover by the IMF. This is a major risk as the next CBN strategy would be to reduce the amount of dollars allocated to banks and oil marketers. If this happens, the parallel market is not prepared to absorb such a  shock in June and will likely lead to heavy volatility trading with large depreciation of the Naira. AbokiFX observed that in March, the Naira was steady as the foreign reserve grew by $43m. In April, the reserves had lost $800m and $600m in May as the crude price recovered. The risk in June is, with the continuous blowing up of pipelines, and decrease in output, how much more will the reserves shrink by. Either way, the CBN will not be eager to defend the Naira further which will put more pressure on the Naira in the parallel market.
  1. EURO 2016 FOOTBALL TOURNAMENTThe international scene will add its pressures to the Naira as the European Football tournament kicks off in Paris this week. AbokiFX believes the Euro will appreciate in the global market as tourists demand increases. This will filter into the parallel market as people trade in USD and GBP for the EUR. This will make the Euro more expensive in exchange for the naira. 
  1. BREXITThe possibility of UK leaving the EU might not materialise after the polls on the 23rd of June. AbokiFX sees huge pressures here as the GBP that has been steady will rise sharply, taking with it the Euro. This will affect the naira negatively as the international rates affect the rates the CBN trades at and all the ATM transactions we use abroad. 
  1. HOLIDAYS AND PRE-SUMMER BOOKINGS – AbokiFX understands that families planning vacations in July and August are starting to make early acquisitions of FX in June. The volume though not a major risk still has a significant impact, on the market price of the Naira trade for FX.
  1. AIRLINES PULL OUT – United Airlines have cancelled their flight operations to Nigeria from June this year as the FX crisis locks in their USD. AbokiFX believe the loss of this airline and the expatriates it brings in further reduces the mount of FX inflow into the country in June. This means less FX hitting the parallel market to sustain the required liquidity needed to keep the Naira steady leading to further depreciation of the Naira.Unless the Dollar / Pound / Euro gain excessively in the international markets, rates should be in the range predicted above for the month of June……………….06 /06/16