Lagos - A kind of parallel universe is taking shape in Nigeria’s
foreign-exchange market. The African country’s traditional forwards market is facing
competition from an upstart based on the new exchange-rate window policy makers
opened six weeks ago.
Bond investors and speculators are switching away from
non-deliverable forwards that are linked to the main interbank exchange rate,
which is tightly controlled by the central bank, and embracing the more liberal
pricing mechanism.
As Nigeria
takes tentative steps toward freeing its currency amid economic turmoil caused
by lower oil prices and a shortage of dollars, the emergence of a separate NDF
market underlines investors’ growing confidence in the so-called Nafex window.
Traders expect the forwards to give them greater control in predicting future
exchange rates and raise the appeal of carry trades in naira assets.
Read also: Forex window in Nigeria for investors, exporters
“It’s created a situation in which you have two NDF
markets,” Samir Gadio, head of Africa strategy at Standard Chartered, said
by phone from London.
“The Nafex NDF market is just emerging. So far there have been tentative
trades, but we are getting to the point where market stakeholders are starting
to quote consistently. The expectation is that the Nafex market will become
more and more relevant.”
The new forwards market comes as the Nafex window helps to
alleviate the dollar squeeze and boost Nigerian assets. The main stock index
has risen 31 percent since it was opened, the second-best performance globally.
While some investors continue to shun Nigeria due to its system of
multiple exchange rates, Cape Town-based Allan Gray. is among those that
have increased their holdings, tempted by cheap stocks and bond yields of about
20 percent.
Africa’s biggest oil
producer has suffered from a scarcity of foreign exchange since crude prices
crashed in 2014, a problem the central bank exacerbated by tightening capital
controls. Governor Godwin Emefiele changed tack by keeping tight grip on the
interbank exchange rate and opening the Nafex window on April 24, allowing the
naira to drop to around the same level as the black-market rate.
The naira trades at 324.5 per dollar on the interbank market
and 376.7 on the Nafex market. Nifex NDFs linked to the interbank rate, of
which around $20 million to $50 million-worth trade each day, rose 0.1 percent
to 357.5 for six-month contracts as of 10:30 a.m. in Lagos. Similar-maturity
Nafex contracts were bid at 382 and offered at 397, compared with 390 and 405
on Wednesday, according to Gadio.
Forward contracts are sometimes used by investors who own
naira bonds to hedge against movements in the currency. Others use them purely
to bet on how much the naira will weaken.