“People are afraid to buy because they don’t know what might happen next. The gain is too fast in just three days,” said a Bureau de Change (BDC) operator who prefers to remain anonymous.

The last three days have been remarkable for the exchange rate between the naira and the dollar, which, as of Friday, December 6, 2024, had gained 8.9% in one week.

Starting the week at N1,672, the exchange rate closed at N1,535 on Friday, December 6, 2024.

While the official market experienced rapid gains in the exchange rate, the parallel market, where forex is sold unofficially, presented an even more unsettling scenario for speculators. The naira was gaining faster than they could sell.

By the end of the week, operators informed Nairametrics that the exchange rate was trading at N1,570/$1, a sharp decline from N1,700/$1 earlier in the week, as the naira continued its strong recovery against the dollar.

Why is the naira gaining

Unbeknownst to many Nigerians, the Central Bank of Nigeria recently launched a new trading system called the Enhanced Foreign Exchange Market System (EFEMS).

EFEMS essentially consolidates all previous official foreign exchange windows into one unified system.

This consolidation replaces the fragmented structure of multiple windows, such as the Investors & Exporters (I&E) FX Window, the SME Window, and the Invisible Window. But how does this explain why the naira is gaining against the dollar?

EFEMS Introduces transparency: According to the CBN, EFEMS is expected to simplify operations and improve price discovery, thereby ensuring that trades are more transparent and easier to monitor.

This has largely contributed to the positive outcomes currently being recorded in the official exchange rate.

For example, one person familiar with the operation of the market suggests that the market is experiencing more supply than demand.
With supply outstripping demand, the naira has gained against the dollar.

However, it is unclear where the supply in the market is coming from, as there is no official data to explain this. For instance, the dynamics of pricing might change if the supply is primarily driven by the central bank.

The new system also mandates a minimum trade value of $100,000 for all interbank FX transactions, which seems to have curtailed speculative activities in the market.


Quoting System:

Another plausible reason is the format for placing orders and pricing the exchange rate.

Unlike the previous opaque system, forex dealers informed Nairametrics that the current system is order-based, similar to the way stocks are traded on the NGX.

For example, bids (buying requests) are displayed on the system along with their bid prices, while offers (selling requests) are also shown with their corresponding prices.

This makes it easier to determine how much forex is available in the market and the prevailing prices.

Another stakeholder suggests that EFEMS also implements a two-way quote system, meaning dealers are expected to display both bid and offer prices. This ensures that when trading forex, participants must indicate how much they are willing to buy and sell, regardless of their position in the trade.


EFEMS/Guidelines Still New:

Analysts also opine that the nascent nature of EFEMS creates some uncertainty among traders.

According to one trader, “As a new system, people are obviously wary and do not want to be on the receiving end,” suggesting that the need to comply with market rules is ensuring transparency for now.

The CBN’s new guidelines for forex trading also introduce rigorous reporting requirements. For example, Authorized Dealers must report FX transactions to the CBN within 10 minutes via an API-based system.

BDCs are required to submit daily activity reports through automated portals, while Commercial and Merchant Banks must adopt real-time reporting to enhance monitoring and oversight.


BDC role

The role of Bureau De Change (BDC) operators is critical under the new regulations, fostering further transparency in the functioning of the market.

For instance, under the new guidelines, licensed BDC operators are allowed to buy foreign exchange (FX) from Authorized Dealers to meet customer needs.

This measure aims to balance market accessibility with effective monitoring and control.

The BDC segment, which had previously been excluded from certain FX market activities, is now positioned to play a more active role in meeting retail FX demand.

This inclusion is expected to provide a buffer against the FX pressures faced by individuals and small businesses reliant on BDC services.

If BDCs are sourcing FX from the same market, their pricing is unlikely to diverge significantly from official rates, reducing the wide disparities previously observed.

This marks a significant departure from earlier years when the black market often influenced official rates.

However, this expanded operational scope comes with a caveat: the total monthly transactions for BDCs are subject to an aggregate cap as determined by the CBN.

It is also worth noting that the Association of Bureau De Change Operators of Nigeria (ABCON) informed Nairametrics that the permission for BDCs to purchase foreign exchange directly from Authorized Dealers is not automatic.

Only BDC operators that meet the current capital requirements are permitted to participate in this market.

“We received the news with mixed reactions,” said Gwadabe, a representative of ABCON. “While it is intended to increase liquidity at the retail end of the forex market, it is contingent on meeting the new recapitalization requirements of either ₦500 million or ₦2 billion as stated in the May guidelines.

However, it does not specifically permit all currently licensed BDCs to purchase foreign exchange from the interbank market.”

He added, “It is tied and subject to meeting the new capitalization guidelines introduced by the CBN in May 2024. This also addresses questions about the sources of funds under the new BDC guidelines raised by many applicants. It is not automatic but conditional on meeting these new requirements.”


Panic Selling

Panic selling is widely regarded as a significant factor behind the sharp appreciation in the exchange rate between the naira and the dollar.

Traders who spoke to Nairametrics anonymously suggested that many of their suppliers were in a hurry to sell, as no one wanted to hold on to a currency rapidly losing value against the naira.
One trader disclosed that they even sold at rates as low as N1,500/$1 on the parallel market, despite it being much lower than the rates obtainable on the official market.

These actions have been attributed to panic selling, particularly by speculators who had hoarded dollars for months in anticipation of the naira’s continuous depreciation.

Several economic reports have suggested that the exchange rate of N1,600/$1 is not reflective of the naira’s true value, a sentiment echoed by CBN Governor Yemi Cardoso at the Bankers’ Committee annual dinner.


Speculators worry

If this is indeed what is happening, more losses could await speculators who are uncertain about when the market will bottom out.

Some speculators also point to the December period, which, according to historical data, is often associated with the naira strengthening against the dollar.
This trend is partly attributed to increased dollar inflows from diaspora Nigerians returning for the Christmas holidays.

Finally, it is worth noting that similar boosts in Nigeria’s forex market have been observed before, where the naira suddenly gains strength before depreciating again.

For example, in April this year, the naira appreciated to as high as N1,072/$1 before it started to weaken again. At the time, the central bank had just lifted the suspension of forex sales to BDC operators, injecting liquidity into the system.

meum:
Tell APC to take back the exchange rate to where they met it before we can celebrate. APC used this dollar exchange rate which according to them was at N216 to campaign against PDP. APC had said the N216 to $1 was too high. I wonder if this N1570 is lower than N216?

TimeManager:
We need stability.


-Kiss the truth!

femisplash:

N216 to $1 whereby using $20billion to defend the naira annually, with an unchecked pervasive of FX arbitrage within the system. How smart are you?

The new system also mandates a minimum trade value of $100,000 for all interbank FX transactions, which seems to have curtailed speculative activities in the market.

Written by Jedisco

There has been some macro changes I'd list below.

1. The naira has been free floated with significant less room to roundtrip. This way the effect of market forces would be more evident

2. Dangote refinery. Imported pretroleum products was our biggest need for forex and the last govt awarding him cheap usd helped get us in this state. However, the refinery is finally up and running and sourcing most crude locally plus then exporting finished products is a game changer. Of couse he has usd loans which he would pay back but these should be more favourable than importation.

3. Ending petrol subsidy- This has brought significant hardship but at same time dampened local petrol usage and smuggling. The previous method gave room to corruption and the govt spent huge amts of forex to forestall this. Worth noting that reduced energy is generally not good for growth.

4. Due to inflation, collapsed naira and all three above, the buying power of the populace has sadly reduced with many manufacturers looking for local alternatives where they can. i.e less appetite for imported goods.

5. Diasporean inflows- A major forex generator for the nation which the CBN has recently successfully been able to streamline. I know this as a few years ago, those looking to send in money would be advertising and exchanging details on WhatsApp or doing so via crypt0 channels due to high fees from the likes of Western Union or the govt insisting only usd can be received locally or the failed Naira4Dollar scheme. Now, there are very good apps which are licenced almost immediate. I believe the forex eventually streams to the govt coffers.

I believe the next major hurdle is fighting inflation tied in with reckless money printing. The CBN seems to be actively looking to address this. It remains to be seen the effect of the new minimum wage.

I was in Nigeria recently and surprised how 'relatively cheap' items have become due to the currency collapse. I think we are at or close to the bottom of this nightmare and soon at a stage where local investments may begin to yeild real returns. I am not rushing in but biding my time. The next 6-12 months should be crucial. If the Naira can keep ranging (1500 -1900) and resists further devaluation, market confidence should gradually return. I'm not looking to catch the bottom but would be keen to step in once things are heading upward

P.S as you may know, I have longed preached folks should defend their buying power and was at the forefront of warning folks to hedge their naira holdings against devluation over the last few years. Even beofre the current govt when I was quite sure the local stock market was due a rally and stated that here, I opted not to invest as I felt estimated returns in Naira might not beat corresponding investments in usd which has proven been the case. Its still worth being hedged so you don't get swept off your feet by a rubbish govt policy but to me, times has come to start paying attention.

femisplash:

N216 to $1 whereby using $20billion to defend the naira annually, with an unchecked pervasive of FX arbitrage within the system. How smart are you?

Primusinterpares:
What we want to see...

Please let it keep coming down.
1k before year end and by mid next year we should be at 400-500/1$.


Before 2025 wraps up we should be at 180/1$.


May 9ja suceed

iichidodo:
It hasn't moved anywhere yet, wait till we get to 18-23 December.....You will witness a big drop to 1250..

femisplash:

N216 to $1 whereby using $20billion to defend the naira annually, with an unchecked pervasive of FX arbitrage within the system. How smart are you?

femisplash:


https://nairametrics.com/2024/12/07/why-the-naira-is-appreciating-against-the-dollar/?amp=1

femisplash:
Technology is not the evil, humans are. Tech is like a chain that restricts a stray dog, that protects the yams from the goat. This same tech is changing the outlook in the ministry of Aviation and the ministry of Interior.