Central Bank of Nigeria Auctions $29.5 Million: Insights into Forex Dynamics and Central Bank Intervention

The Central Bank of Nigeria (CBN) made a significant move on Thursday, June 22nd, 2023, by auctioning $29.5 million at the interbank window. This auction showcased the CBN's intervention in the forex market, revealing intriguing dynamics in the banking sector.

CBN Auction Results

Under this auction, the CBN sold forex to a group of nine banks, including First Bank, Ecobank, Access Bank, Standard Chartered, Wema Bank, FBN Merchant Bank, Coronation Bank, and Globus Bank. The distribution of the forex varied among the banks, with four banks purchasing $5 million each, one bank acquiring $2 million, and the remaining banks securing $2.5 million apiece. As per the auction rules and processes, each bank bought at different prices, creating a diverse range of rates.

Rate Variations

Notably, the highest exchange rate recorded during the auction was N770/$1, which accompanied the sale of approximately $5 million. Conversely, the lowest exchange rate observed was $760/$1, involving a transaction worth around $9.5 million. These variations highlight the intricacies of the forex market and the different rates at which the banks participated in the auction.

Central Bank Intervention

This auction marks a significant step for the CBN, as it is the first time the apex bank has intervened in the forex market through an auction since implementing operational changes. This move aligns with an earlier report from Nairametrics, confirming that the central bank's new forex policy follows a managed float exchange rate model rather than a fully free float, as initially speculated.

Motivation for Intervention

CBN Deputy Governor, Kingsley Obiora, emphasized the necessity of central bank intervention, stating that no country, including the United States, has a completely free float exchange rate. This perspective indicates that the central bank remains vigilant and proactive in managing and controlling exchange rate depreciation. By providing liquidity in the forex market to address increasing demand, the CBN aims to stabilize the currency's value.

Market Reactions: Airlines and Parallel Market

In parallel developments, Nairametrics observed that international airlines have adopted a market-driven daily exchange rate to determine their ticket prices. These airlines quoted the closing exchange rate of N763/$1 for Wednesday, as per the official rate. It is noteworthy that these adjustments in ticket prices align with the new central bank policy on forex, which had led to a shift from N663/$1 to N770/$1.

Furthermore, at the parallel market, the exchange rate closed at approximately N767/$1 on Thursday, reflecting a slight increase compared to the average price of N770/$1 from the previous day. The dynamic nature of the parallel market reinforces the significance of the CBN's intervention and highlights the ongoing fluctuations in the forex market.

The CBN's recent auction of $29.5 million to banks provides valuable insights into the intricacies of the forex market. This intervention affirms the central bank's commitment to managing the exchange rate and ensuring stability. The adoption of market-driven exchange rates by international airlines and the parallel market's fluctuations further illustrate the evolving nature of the forex landscape. Market participants continue to closely monitor these developments as they shape Nigeria's economic outlook.