In panic, forex speculators prepare to dump dollars

For most speculators who bought forex at less than N400/$1, they are pondering whether to sell.

Forex speculators are apprehensive that a slew of circulars issued by the central bank during the week could lead to a strengthening of the naira against the dollar. The CBN said it will sell $10,000 per Bureau De Change operator ahead of the reopening of the air space.

For most speculators who bought forex at less than N400/$1 just before the first round of devaluation in March, they are pondering whether to sell at the current rate of N475 in time before panic sets in. This apprehension is reminiscent of 2017 when the CBN announced the new Investor and Exporter Window for trading forex at market-determined prices.

The move led to a strengthening of the naira from N500/$1 to N360/$1 piling huge losses on speculators who betted for more depreciation.

Speculators show panic

Nigeria’s exchange rate policy has meant many businessmen have had to resort to crude ways of hedging against foreign exchange rate risk. As rumours of devaluation swirled in March some quickly converted their naira into dollars sending the parallel market exchange rate rocketing past the official rate.

For Mike a businessman who deals in luxury fashion wear, the fear is real and he is pondering whether to sell now and book his profits or wait to see if the exchange rate will depreciate further. “I bought forex at less than N380 earlier in the year just before the black market rate started depreciating. At N477/$1 my margin gain is close to N90 so selling now means I remove my profits rather than let it disappear” he explains preferring to go by his first name

Another FX street trader Musa, feared that the exchange rate could strengthen if the CBN pumps in forex to the BDCs on Monday as anticipated  According to him, “buyers are running from buying forex now because there seems to be panic selling at the moment. I lost some money between Friday and Saturday and would definitely avoid buying forex at the moment.

Predicting the direction of the exchange rate has become easy for some speculators. All they need to do is watch the price of oil which is perfectly correlated with the direction of the exchange rate. Another major factor as many have come to learn is what decisions come out of Plot 33, Abubakar Tafawa Balewa Way, the head office of the Central Bank.

Last week, the apex bank issued a slew of circulars culminating in an order warning that it will go tough on exporters who are guilty of forex non-repatriation. It also directed banks to submit the names, addresses, and Bank Verification Numbers (BVNs) of all the exporters who have failed to repatriate their export proceeds. Necessary ‘action’ would be taken against such defaulters, the CBN said in a statement.

A BDC operator Ismail of Ango Gold expressed concern over what could happen this week in this forex market if operators do not comply with CBN’s instructions. “We are worried about the CBN’s latest warnings as sellers will being arrested if being caught hiking the price.” 

Waiting for CBN

This week is likely to be a defining moment for what could happen to the exchange rate. If the central banks sell $10,000 to half of the nearly 3,000 registered BDC’s we could see a turnover of $15 million in the first week. Add to a daily average of $42 million at the Investor & Exporter window (NAFEX) and we could finally start to gauge what the true value of the naira against the dollar really is.

There is also the wired forex transfer market which caters to people trading in hundreds of thousands of dollars in a single transfer but circumventing the official exchange rate market. The exchange rate in this market is typically sold at a premium to the official black market price trading in the streets of Lagos Island.

But even this market is under threat from the CBN’s hammer, with banks instructed to report BVN linked accounts connected to export proceeds not declared in the official market. The CBN also booted out third parties from accessing the Form M, a document required for accessing forex to pay for imported goods.

These are all red flags to Mr. Peter Afolayan a Private Investor who trades in Equities, Commodities & other financial instruments with foreign currency-denominated holdings in the UK and Nigeria. He believes the announcement of the opening of the airspace to travel and the announcement of the sale of forex to BDCs is bad news for anyone holding the dollar. According to Mr. Afolayan, “I planned to sell off my holdings last week but will do so this week… I see the rates crashing to N410-420/$1 because of the recent circulars of the CBN”. However, if you are long on the dollar and perhaps use it as savings then I suggest you keep it”

But not everyone is this optimistic about the Naira strengthening. A recent report from Goldman Sachs, “a significant devaluation of the naira is likely in 12 to 18 months to stabilize Nigeria’s external accounts. An exchange rate of 500-550 per dollar should bring about the desired balance…. compared with a current rate of about 407”.  

Nigeria’s balance of payment, a tool used to determine the value of a local currency’s value against the dollar is in deficit, leading to speculations that the CBN probably needs to devalue once more to achieve the right balance.

The true test will happen this week and all eyes will be on two markets. The black market and the BDC market.

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