Naira devalues, Volatility Surge as CBN Removes Spread Limit

Naira forwards rose to record highs and volatility surged after the Central Bank of Nigeria removed a limit on bid-offer spreads in the foreign-exchange market,

raising expectations the currency is set to extend declines as it trades more freely.

The naira weakened 1.1 percent to 287.5 versus the dollar in the spot market, having swung between 280.22 and 293.38, little trading took place, according to available reports. While the national currency goes for 365/$ at the Lagos parallel market on Monday.

While three month non-deliverable forward contracts jumped 4.3 percent to a record 329.5 per dollar by 1:37 p.m. in Lagos, contracts maturing in a year rose 4.3 percent to 366.5, also the highest level on a closing basis. One-week historical volatility increased to 26 percent, compared to an average of 8.6 percent over the past year, according to data compiled by Bloomberg.

On Friday, the central bank ended a rule capping the difference, or spread, between bids and offers in the foreign-exchange interbank market at 50 kobo, according to local media reports.

Speaking to Bloomberg, Kunle Ezun, an analyst at Ecobank Transnational Inc. said: “That’s why you are seeing that volatility.”

“The spread used to make prices move within a defined range, which is not good. The expectation is that central bank will allow the market to trade freely by removing the spread and letting liquidity determine the rate.”

The naira depreciated 29 percent against the dollar last month after the Abuja-based regulator ended a 16-month peg of 197-199 per dollar. That and the capital controls used to defend it led bond and stock investors to flee the country and exacerbated an economic crash caused by the fall in oil prices from mid-2014.

The economy contracted in the first quarter and is likely to shrink over the whole of 2016, the International Monetary Fund said on July 8.

Few investors have returned to Nigeria’s markets since the devaluation and many think the exchange rate needs to weaken further.

Importers of items such as glass, textiles and rice are still banned from using the interbank market to buy hard currency and are forced on to the black market, where the naira trades at about 365 per dollar. 

Central bank Governor Godwin Emefiele and Deputy Governor Sarah Alade met investors in the U.S. and London last week to entice them to buy naira assets. Emefiele dismissed suggestions that there was too little foreign-exchange liquidity and said the black market was too small for them to use as a gauge of the naira’s true value, according to two people with attended the private talks and asked not to be identified.

“The interbank rate’s too strong,” Willacy at INTL FCStone said by phone from London. “You just have to look at the parallel market. There’s still a big difference. The main factor is probably that the importers who were banned previously are still banned.”

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