FX market confidence losing traction on fading liquidity, credible price formation

The record progress achieved in Nigerian FX market has seemingly taken a negative turn. 
Already, the remarkable achievement seen in the last few months is threatening to be eroded, taking Nigeria rapidly back to an era of pegged rates, illiquidity, opacity and low investor confidence.

In the last couple of weeks, the Nigerian FX market has experienced a dearth of credible price formation and the levels of transparency that would serve to encourage the flow of foreign currency into the market, as gathered from potential foreign and Nigerian portfolio investors.
 
All of this happens even as the OTC FX Futures market has successfully positioned itself through its revised standards and more operation-friendly execution, to receive substantial inflows from foreign (and Nigerian) portfolio investors.
 
“This lack of confidence in the market is being manifested in the turnover results being experienced in the market”, an informed market source said at the weekend.

This is evidenced in spot FX turnover on trades between the banks and their clients from the period week ending June 24, 2016 to September 23, 2016.

Trading activity in the Spot FX market between the banks and their clients during the week ending September 30, 2016 stood at about $332million, with an average daily turnover of $66million, a 7% decline when compared to the average weekly turnover from the preceding week.

Turnover in the Spot FX market among banks during the reporting week, on the other hand, recorded a 79% increase in turnover at $107million; with an average daily turnover of $22million. 

Amid this, dealers said the market still has a very long way to build liquidity to the levels that will make for the better functioning market that was experienced pre 2015.

The inter-bank FX market closed at $/N311.62 for the week ending September 30, 2016, from a close of $/N308.37 the preceding week.

This, analysts said, is evidence of an artificially ‘strong’ naira, when compared with the BDC rate of $/N476. 

Comments received from market participants however, reveal that there is almost ‘zero’ confidence in the published inter-bank rates as the US Dollar is unattainable at those levels and this illiquidity in the inter-bank market is serving to stoke the BDC/parallel markets rates which have all but run away with themselves.

“The Nigerian FX market needs a major and rapid intervention if there is to be any turnaround for the better in the market and potentially, an appreciation of the naira. The CBN will have to take the difficult but essential step to truly free the Nigerian FX market, as that is the only way for it to achieve its objective of stabilising the local currency. 

“The bank has communicated to the world that the Nigerian FX market has been liberalised and it is time to follow its words with deliberate action, or inaction, as the case may be, to ensure that the integrity of the leaders of the nation’s financial markets is not called to question globally,” an informed market source Metrobusinessnews.