Forex Liquidity Decline To 21-month Low

As international investors remain cautious, inflows through the Investors and Exporters window (I&E) fell by 65.7% month on month in July.

According to FMDQ data, foreign exchange inflows into the I&E end of the market fell from $1.77 billion in June to $608.00 million in July, the lowest level since April 2021, when an inflow of $564.20 million was reported.

Similarly, activity at the I&E window fell 10.1% week on week to $389.1 million last week, with the FMDQ Securities Exchange FX Contract Market slowing down as the total amount of open contracts remained at $6.3 billion.

Based on traders, the suspension was caused by the Central Bank of Nigeria's (CBN) decision to temporarily deactivate all contracts with maturities ranging from one to twelve months as part of its ongoing reforms. Data from the previous month revealed that both domestic and overseas investment inflows had decreased.

In particular, inflows from domestic investors fell by 60.6 percent month on month to $561.00 million in July, compared to $1.42 billion in June.

Inflows from the CBN had fallen by 70%, while those from non-bank corporates and exporters had fallen by 65.6 and 63.9%, respectively. Individual inflows had also decreased by 51.2% in July.

Foreign inflows remained poor, falling by 86.5% to $47 million in July as foreign investors remained apprehensive about returning in large numbers despite the foreign exchange market reform, as FX backlogs remained uncertain.

The naira's value at the parallel and official markets went in different directions last week, with the local currency depreciating at the unofficial market while strengthening at the I&E window. 

The naira depreciated against the US dollar on the parallel market, falling by N14, or 1.61%, week on week to N881 per dollar from N867 the previous week. Traders blamed the continuous dollar scarcity and speculative operations, while producers and importers sought easy access and supply of dollars.

On the other hand, at the investors and exporters forex window, the naira strengthened against the US dollar for the third consecutive week, gaining N32.60 week on week to settle at N743.07 per dollar, up from N775.94 per dollar the previous week. Despite rising demand for the dollar, the naira remained resilient in this category.

The naira fell against the US dollar across all forward contract tenors at the FMDQ Securities Exchange (SE) FX Futures Contract Market. Rates fell by -2.88, -3.10, -3.40, -4.07, and -1.84% for 1-month, 2-month, 3-month, 6-month, and 12-month contracts, respectively. Demand pressure remained across the market, resulting in these developments.

Meanwhile, after 10 straight weeks of loss, Nigeria's foreign reserves climbed by $13.14 million a week on week to $33.97 billion as of August 2, 2023.

Rising global oil prices had a beneficial effect on the reserves. Brent crude oil prices rose 2.5% week on week, reaching $86.17 a barrel in response to Saudi Arabia's announcement to prolong its daily output reduction of 1 million barrels until September.

Oil futures prices climbed last week owing to fears about limited global supplies and delays in Libyan oil output. Oil prices finished at a weekly high of $86.24 per barrel, the highest level since June 2022. Similarly, the price of Bonny Light crude rose by 1.13% week on week to conclude at $89.71 per barrel, up from $88.71 per barrel the previous week.

Forex dealers and experts predict that in the short term, liquidity conditions are expected to remain fragile due to the ongoing changes in the FX market.

According to Cordros Research, they “anticipate weak foreign inflows in the short term, as foreign investors will likely adopt a wait-and-see approach in the near term as they await the CBN’s actions in clearing its FX backlogs and the direction of short-term interest rates amid high inflation.”

While noting that the Nigerian foreign exchange market continues to face challenges due to the naira's depreciation against the US dollar, analysts at Cowry Asset Management say they expect the naira to trade in a relatively calm band across the forex markets barring any market distortions that may disrupt supply.