SAT 26 FEB, 2022-theGBJournal- After sixteen consecutive weeks of decline, Nigeria’s FX reserves closed higher by USD40.68 million w/w to USD39.84 billion (23rd February 2022).
Consequently, the naira appreciated by 0.2% and 0.3% w/w to NGN416.00/USD and NGN574.00/USD at the I&E window (IEW) and the parallel market, respectively.
At the IEW, total turnover (as of 24th February 2022) declined by 10.2% WTD to USD442.98 million, with trades consummated within the NGN406.00 – 453.12/USD band. In the Forwards market, the naira rate was flat at the 1-month (NGN418.51/USD) contract; however, the rate depreciated at the 3-months (-0.1% to NGN424.41/USD), 6-months (-0.2% to NGN425.07/USD) and 1-year (-1.6% to NGN455.35/USD) contracts.
In our opinion, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR. However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain pretty low.
Thus, FPIs which have historically supported supply levels in the IEW (53.8% of FX inflows to the IEW in 2019FY) will be needed to sustain FX liquidity levels. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.
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