Hard Times For Speculators Of Foreign Exchange Markets

Currency speculators who have been aggressively ‘stocking’ the dollar at a premium in anticipation of a near-term rise in the exchange rate in the past week could be exposed to increased risks as the value of the greenback against the naira falls in the coming days.

Though the dollar retained a slight advantage over the local currency, market analysts believe the pressure would ease as players reconsider the exchange convergence speculation, which Dr. Aminu Gwadabe, President of the Association of Bureaux De Change Operators of Nigeria (ABCON), dismissed as a mere “rumour.”

Following reports that the removal of the official exchange rate from the Central Bank of Nigeria’s (CBN) website could mean the start of the expected rate convergence, demand for dollar increased at both the investors’ and exporters’ (I & E) window and parallel market in recent days.

As a result, the naira has been under renewed pressure in the Investors and Exporters (I & E) window as well as the parallel market. One of the factors driving up the FX demand curve was that the media stories came at a time when most international portfolio investors were booking income. Although currency speculators have increased their portfolios at a premium, the information driving market behavior, which the apex bank has not officially verified, may turn out to be incorrect.

Gwadabe revealed at the weekend that Bureaux De Change (BDC) operators were supported at $393/$ last Friday, implying that the FX rate unification has yet to take off, despite his warning that speculators might lose as much as N100 billion in the next month.

Last year, CBN Governor Godwin Emefiele announced the central bank’s intention to seek the convergence of various rates in the I & E window. Zainab Ahmed, the Minister of Finance, Budget, and National Planning, recently hinted that official transactions, such as the monthly monetisation of government earnings, will be conducted at market rates.

Analysts speculated that the much-anticipated harmonisation may have begun after all when the CBN recently removed the N379/$ official exchange rate from its website. The naira has depreciated marginally on the black market and I&E loophole, also known as the Nigerian Autonomous Foreign Exchange (NAFEX) market and the parallel market, since the announcement.

After the dollar gained 0.17 percent last week, the naira closed trading at N412/$ at the I & E market. It began trading on Friday at N411.08/$. However, activity on the parallel market remained erratic around N485/$ over the weekend, with varying degrees of white noise.

While the renewed pressure, which was also fuelled by profit-booking in the equities sector, may have fueled speculative conduct, Gwadabe said the CBN’s continuous interference in the BDC market was a major dragnet that speculators should be wary of.

He said over the weekend that the CBN is committed to supporting over 5,000 BDC operators across the country in order to boost liquidity and preserve the naira’s value. He urged a return to normal business, claiming that the ongoing speculation distorting market stability was costing speculators a lot of money.

The ABCON boss attributed the continued depreciation of the naira at the parallel market and I&E windows to dollar hoarding, which he said has a negative impact on economic development. The perpetrators, he claims, are generating artificial scarcity in the foreign exchange market.

ABCON and CBN-licensed BDCs, according to Gwadabe, will battle alongside the regulator to ensure that speculators lose their money if they continue to engage in illegal activity. He denied rumors that the CBN had switched to the NAFEX for official transactions, saying that the BDC rate stayed at N393/$.

“With disdain, the ABCON and CBN have observed the speculative behavior currently affecting the market, fueled by the false information that the CBN has adopted the I & E window as its official rate. The above information is false because, for our service on Friday, we still funded our accounts at our daily rates of N393/$, not I & E window rates,” he said.

As a result, the ABCON CEO cautioned his colleagues against engaging in speculative trading, noting that the CBN remains committed to the group’s relationship and is exploring various ways to increase liquidity.

“ABCON will continue to keep you updated and provide you with guidance as needed. We encourage all members to continue to support the CBN as a strategic partner and in the economy’s best interests,” he said.

The CBN’s Naira 4 Dollar Scheme, according to Gwadabe, will increase liquidity and boost the naira’s fate.

He went on to say that the policy would make sending remittances to Nigeria easier and cheaper for Nigerians living abroad, as well as raise dollar inflows.

To raise the supply side of the FX industry, Emefiele said the CBN implemented a N5 rebate for every $1 remitted through CBN-licensed foreign money transfer operators (IMTOs). He stressed that the new measure would make sending remittances through formal channels more appealing to Nigerians living abroad.

As part of its renewed efforts to shore up FX liquidity, the apex bank has implemented many reforms in the remittance sector since last year. The reforms came in the wake of a global drop in diaspora remittances and foreign capital inflow, which was due in part to the COVID-19 pandemic.

Last year, remittances from the diaspora to Nigeria decreased by 27% year on year (YoY), from $23.55 billion in 2019 to 17.2 percent in 2020.