The naira plunged by 31 per cent to 288.85 against the United States dollar on Monday at the close of trading at the newly established interbank market.
The local currency also depreciated at the parallel market where it closed at 346 to the greenback, down from around 330 and 335 on Friday.
The Central Bank of Nigeria had last week introduced new guidelines for the nation’s foreign exchange market with the adoption of a single structure through the interbank/autonomous window.
The naira, which was pegged at 197-199 per dollar before the emergence of the new forex policy, closed at 288.85 to the dollar on Monday, with the forces of demand and supply coming to play to determine the value of the nation’s currency after the CBN allowed it to float freely.
The CBN said it cleared a total foreign exchange demand backlog of $4bn with a dollar exchanging for N280 at the foreign exchange market.
The apex bank, in a statement issued on Monday by the Acting Director, Corporate Communications Department, Mr. Isaac Okoroafor, expressed satisfaction with the performance of the market on its first day.
The statement reads in part, “Nigeria’s new foreign exchange market made a robust take-off on Monday, June 20, 2016, clearing all the backlog of $4bn pent-up demand for foreign exchange, with the naira exchanging at 280 to the United States dollar.
“The objectives of the CBN to clear the forex demand backlog, perform its role as strictly a market intervention participant, and re-launch a functioning and efficient interbank market were met.
“The CBN, in line with its desire to promote a transparent, liquid and efficient market, and in order to engender market confidence and ensure credible price formation, intervened in the market through a special secondary market intervention sales addressing the issue of the FX demand backlog by clearing $4.02bn through spot and forward sales.
“This served in no small way to stimulate price discovery, with the determination of a marginal rate of $/280.00 through the special SMIS process. So, we can state to you categorically that the FX demand backlog has now been cleared and behind us for good.”
Okoroafor assured market participants and the general public that the bank was committed to making the FX market globally competitive, credible, transparent, liquid and efficient.
Our correspondents gathered that the naira was trading around 270 to a dollar in the early hours of trading on Monday with no deals consummated by the banks as dealers were only interested in buying.
A currency analyst at Ecobank, Mr. Kunle Ezun, said when the market opened in the morning, the naira went up to 285 to the dollar and later came down to 255 to 260 before the CBN intervened in the market by selling over $500m at the rate of N280 per dollar.
He said, “We didn’t have any firm deals; no deal was consummated until when the CBN intervened and gave the rate at 280 and that became the rallying point for the market. We saw price discovery; different banks were quoting on two-way quote for the naira and dollar.
“We saw a lot of quotes today; banks were willing to quote but everybody was willing to buy, not to sell until the CBN came to the bank later in the day to sell. When the CBN sells to you, you are expected to sell in the market. So that created activity in the market.
“What we had today (Monday) is more like a market depreciation of the naira to 280. Tomorrow (Tuesday), you may see appreciation of the naira or further depreciation. It depends on how much the CBN is willing to supply to the market. If they are able to supply what they supplied today in two or three times consecutively, the market will be calmed and the naira will appreciate in the next few days.”
The Head, Research and Investment Advisory, Sterling Capital, Mr. Sewa Wusu, said the naira closed at 288.85 after a little bit of oscillation, adding, “The interplay of demand and supply has started. I think the proper value of the naira will be determined as time goes on and more dollars will also come.”
He, however, said foreign portfolio investors might still be on the sidelines to watch developments to see how the current mechanism would play out before they would begin to have some level of comfort on the level of dollar liquidity.
The President, Association of Bureau De Change Operators of Nigeria, Alhaji Aminu Gwadabe, said the naira fell to 346 against the dollar at the parallel market, because “the interbank market has not effectively taken off.”
He said, “There is no way demand can reduce at the parallel market now because the 41 imported items are still banned from accessing official forex market,” he said, adding that the backlog of dollar demand was far higher than $4bn.
“Up untill now, many correspondent banks have yet to send their unmet obligations to the Central Bank of Nigeria. And for the foreign inflow that we are expecting, there is still lack of confidence by the investors as to how liquidity is going to be sustainable so that when they want to move out, they won’t have the problem of dollar scarcity. So, they are watching to see how liquid the market will be, and that will take a couple of weeks before this can be unravelled,” Gwadabe explained.
There may be “higher volatility until the market becomes more functional,” Bloomberg quoted the Head of Africa Strategy at Standard Chartered Bank Limited in London, Samir Gadio, as saying in an e-mailed response to questions.