Why Naira is Gaining at the Black Market
The Nigerian naira gained massively against the US dollar at the black market after hitting a record low of over N900/$1 in the previous week.
Within five days, the naira gained over N200 to trade at an average of N680/$1 as of the close of trading activities on Friday, 11th November 2022.
In a conversation with several black market traders on Friday, Nairametrics gathered that the US dollar was selling within N714/$ and N680/$ for cash transactions, representing a 28% gain from N870/$1 recorded last week Friday, according to the Nairametrics exchange rate tracker.
Reason for naira gaining: Black market traders have attributed the sudden improvement in the local currency to eased demand and increased inflows of FX in the market.
- Mr. Sulaimon a trader in Lagos said, “the changes in the rate are really very sudden, but it is as a result of increased dollars in the market compared to the high demand in the previous week.”
- Another trader, Buzu, opines they have seen increased supply and very few people are buying due to fear that the exchange rate could appreciate further.
- Sources also indicate there was the injection of forex in the market by the central bank even though there are no official records backing this claim.
- Nigeria recently reported over 1 million barrels per day in crude oil production, a major boost for the country’s forex reserves.
Cool-off in demand: FX traders attributed the changes in the exchange rate to the decline in the demand for dollars in the market. In a phone conversation with Malam Nasri at the Lagos International airport, he explained that the demand for FX has decreased significantly compared to what it was in the last two weeks.
- “On Friday morning, I bought dollars at the rate of N720/$1, and by evening, I am buying at the rate of N670/$1 because a lot of people are now bringing dollars into the market to sell,” he said.
- Just as the theory of supply and demand helps in determining prices in a free market, rising demand and improved supply have contributed to the moderating rate.
Improved supply: There have been questions about what triggered the improved supply of FX in the black market during the week. However, there were reports across some media outlets that the US will restrict the acceptance of dollars printed below 2021, to checkmate the dollar stockpile in Africa.
- While this report has not been confirmed by any credible source, the mere speculation has put some FX hoarders on their feet, who do not want to be caught unaware, incentivising them to convert their FX for naira.
EFCC raids in Abuja: The Nigerian anti-graft agency, the Economic and Financial Crimes Commission (EFCC), reportedly raided the Wuse Zone 4 axis, a Bureau De Change trading hub in Abuja, and arrested some operators in the market over the declining value of the naira against the US dollar.
- There have been concerns in the past week by analysts that the fall of the local currency in the past weeks was rather speculative than intrinsic.
- Hence, the move by the anti-graft agency to arrest traders selling the US dollar at a higher rate was aimed at serving as a deterrent to others, whilst discouraging currency speculation.
History check: This time last year, the exchange rate appreciated from about N577/$1 in early October to about N535/$1 by mid-November.
- The exchange rate at the black market will eventually close the year at about N575/$1 by late December before closing the year at N560/$1
What this means: Predicting the exchange rate is an incredibly difficult undertaking as a dynamic interplay between demand and supply is the official determinant.
- If Nigeria’s oil production output continues to rise and approach 1.5-1.7 million barrels per day, then it is likely that the central bank will be able to sustain supply.
- If this is the case, then we expect the exchange rate to stay below N700/$1.
- However, this also depends on oil prices which we expect to remain at current levels of $96-$100 per barrel.
- We also anticipate an influx of forex from diaspora Nigerians during the Xmas holiday in December as is usually the case every year. This will positively impact FX rates.
But…again, this depends on demand not outpacing supply. If the level of demand increases beyond the supply available (regardless of crude oil production), we could be in for another shocker by the end of this year.
Source: nairametrics
