JP Morgan Index: Naira depreciates by N4 in 3 days, as CBN increases banks’ forex trading reserves

The Central Bank of Nigeria, CBN, yesterday moved to forestall the removal of Nigeria from the JP Morgan’s Government Bond Index as it increased banks’ foreign exchange trading position.

The apex bank also reversed its decision to ban invisible transactions from the official foreign exchange market, thus making it easy for foreign investors to enter and exit from the nation’s financial market.

The apex bank, however, banned banks from selling dollars purchased from the official market and interbank market to Bureaux de Change and other authorised buyers.

This is coming on the heels of further depreciation of the naira in the interbank and parallel market, where the naira depreciated by N4 and N2.5 respectively in three days.

Meanwhile, bank foreign exchange dealers yesterday agree to halt trading whenever the naira depreciates more than two per cent in the interbank market.

Last Friday, United States JP Morgan had placed Nigeria on a negative index watch on its Government Bond Index (GBI-EM), threatening to completely remove the country from the GBI-EM if there is no sufficient dollar liquidity in the interbank market to facilitate entry and exit of investors from the nation’s financial market.

JP Morgan said: “If we are unable to verify sufficient liquidity in Nigeria’s spot forex and local treasury bond market it will trigger a review. for removal.

“Conversely, if liquidity improves and investors are able to transact with minimal hurdles, Nigeria will be removed from index watch negative.”

To forestall this development, the apex bank yesterday in a circular signed by Mr. Olakanmi Gbadamosi, Director, Trade and Exchange Department, said: “The Net Foreign Exchange trading position has been reviewed upward, from 0.1 per cent of the shareholders’ funds unimpaired by losses, to 0.5 per cent of the shareholders’ funds unimpaired by losses.”

This allows banks to hold more dollars for trading in the interbank market and thus increase liquidity in the market.

Naira depreciates by N4 in 3 days

The naira depreciated by N4 in three days at the interbank foreign exchange market even as bank foreign exchange dealers, yesterday, agree to halt trading whenever the naira depreciates more than two per cent in the interbank market.

From N185.10 per dollar at the close of business last Friday, the interbank exchange rate rose steadily to N189.1 at the close of business yesterday. Similarly, the naira depreciated by N2.50 at the parallel market as the parallel market exchange rate rose to N195 per dollar at the close of business yesterday from N192.5 last Friday.

Operators attributed the depreciation in both markets to increased demand for dollars. “People are looking for dollars to buy,” an operator told Vanguard on condition of anonymity.

According to the Ecobank Daily market report, “Interbank depreciation was driven by stronger than expected dollar demand to cover import bills (energy and manufacturing sectors) and capital flight ahead of the elections.”

The sharp depreciation has widened the gap (premium) between the official exchange rate and the interbank exchange rate as well as the parallel market rate. With the official exchange rate at N168 per dollar, the premium between the official rate and the interbank rate now stands at N21.1 per dollar, while the premium between the official rate and the parallel market rate now stands at N27.