In a significant market development on Tuesday, Nigerian non-deliverable currency forwards plummeted to unprecedented depths against the U.S. dollar, closely aligning with declines observed in the official spot market, as per data from the London Stock Exchange Group (LSEG).
Non-deliverable currency forwards, financial instruments utilized for hedging against potential exchange rate fluctuations, signaled a market anticipation of the naira’s exchange rate reaching 1,427.50 against the dollar in the coming month.
This follows data from FMDQ Exchange on Monday revealing that the naira had reached a historic low of 1,421 per dollar on Friday within the thinly traded official market. Notably, this value was even lower than the rates observed in the unofficial parallel market, where the currency experiences free trading conditions.
On the regulatory front, Nigeria’s central bank issued a warning to financial institutions regarding the underreporting of transactions in the financial market. The central bank expressed concerns about the resultant misinformation, attempts at creating price distortions, and market manipulation. It emphasized that such activities would face sanctions.
The official exchange rate of the naira has been steadily converging with parallel market levels, partly attributed to the central bank’s delay in settling outstanding amounts owed in forward deals. This delay has further exacerbated the scarcity of foreign currency in Nigeria, the largest economy in Africa.
As of now, the central bank still holds approximately $5 billion in matured forwards, with a previous disbursement of $2.5 billion to manufacturers and importers. The backlog remains a focal point of concern for investors, despite assurances from the Central Bank of Nigeria (CBN) that it is actively working to clear the outstanding forwards.
In a cascading effect, other maturities in the forwards market also experienced declines on Tuesday, with traders quoting the currency as low as 1,626.18 naira per dollar for a one-year horizon. The evolving situation is closely monitored by investors and financial analysts amid the ongoing challenges facing the Nigerian economy.
By Delino Gayweh
Serrari Financial Analyst
January 29, 2023
