CEM REPORT , MARKET | The Nigerian foreign exchange market witnessed a surprising development on Wednesday, March 13th, 2024, with the official and parallel market rates for the Naira/US dollar, converge at ₦1,615. This marks a remarkable narrowing of the gap that has historically existed between the two markets.
Naira Loses Ground at NAFEM, But Gap Narrows
Data from the FMDQ Securities Exchange revealed that the dollar was quoted at ₦1,615.94 at the Nigerian Autonomous Foreign Exchange Market (NAFEM), the official market for FX transactions. This represents a slight depreciation of the naira compared to the ₦1,603.38 rate seen on Tuesday.
However, the key takeaway lies in the parallel market, often referred to as the black market. Here, the dollar was also quoted at ₦1,615.93, a minuscule difference from the official rate. This unprecedented convergence in rates signifies a potential narrowing of the gap between the two markets.
Increased Dollar Supply, But Naira Still Slides
While the CBN’s efforts to increase dollar supply appear to be impacting FX market activity, the impact on the naira’s value remains debatable. Market data shows that the intraday high for the dollar reached ₦1,635 on Wednesday, marginally higher than Tuesday’s closing rate of ₦1,637.
Despite the increased supply by FX players like banks, exporters, investors, and the CBN itself, the naira still lost ground. The intraday low fell to ₦1,500 compared to ₦1,425.35 on Tuesday. This indicates continued pressure on the naira, despite the efforts to boost dollar liquidity.
On the bright side, the daily FX market turnover witnessed a significant increase, rising by 103.59% to $248.75 million on Wednesday. This suggests a more active market with potentially improved liquidity in the near future.
Looking Forward: Will Convergence Hold?
The convergence of official and parallel market rates presents a fascinating development in the Nigerian FX market. While it’s too early to say definitively whether this will be a sustained trend, it raises several questions.
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Has the CBN’s strategy to increase dollar supply and clear the backlog started to stabilize the market? Will the naira continue to depreciate despite the convergence? Will the gap between the official and parallel market rates widen again in the future?
Analysts believe that the combined effects of increased liquidity, backlog reduction, and measures to make naira assets more attractive could lead to a more stable and liquid FX market in the medium term. However, ongoing economic factors and global market fluctuations will undoubtedly continue to influence the naira’s value.
The coming days and weeks will be crucial in understanding the true impact of recent policy changes and whether the naira’s convergence marks a turning point or a temporary blip in a volatile market.
