Parallel market emerges in Nigeria's currency

File image

File image

Published Jun 9, 2017

Share

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.

BLOOMBERG 

Related Topics: