The volume of dollars traded (turnover) in the Investors and Exporters (I&E) window of the foreign exchange market, forex, fell for the second consecutive month in May prompting a 50 kobo depreciation of the naira during the month.
The daily activities in the I&E window showed that turnover fell month-on-month, MoM, by 5.0 per cent to $2.5 billion in May.
This follows a 59.8 per cent MoM decline in April to $2.63 billion.
Consequently, turnover in the I&E window has fallen by 62 per cent in two months from $6.55 billion in March.
Although turnover for the five months to May increased year-on-year, YoY, by 130 per cent to $17.03 billion from $7.42 billion in the corresponding period of 2021, it however declined MoM, in four out of the five months of this year.
In addition to the decline in April and May, the turnover in I&E declined in January, MoM by 13 per cent to $3.22 billion from $3.7 billion in December. Similarly, the turnover declined by 33.8 per cent to $2.13 billion in February, before rising by 207.5 per cent to $6.55 billion in March.
Reflecting this trend, the Naira depreciated for the second consecutive month in May by 50 kobo in the I&E window.
Exchange rate data from FMDQ showed that the Naira depreciated to N419.5 per dollar at the end of May from N419 per dollar at the end of April 29th, 2022. The naira had, in April, depreciated in the I&E by N2.83 from N416.17 per dollar in March.
But the naira recorded a bigger depreciation of N24 in the parallel market in May, as the market exchange rate rose to N609 per dollar at the end of the month from N585 per dollar at the end of April.
Analysts comments
nalysts at Afrinvest attributed the sharp depreciation in the I&E window and the parallel market to supply and demand imbalance in the forex market.
Reviewing developments in the forex market in May, they said: “ The European Union (EU) in May reached an agreement in principle to phase out oil imports from Russia.
“This embargo is expected to restrict around 75.0% of Russian oil to the region, and by year end up to 90.0%. While Russia expects to find other buyers for its crude oil, we anticipate that production volumes for Russian oil companies would remain below pre-sanction level.
“In April, nearly one million barrel per day (mbpd) of oil production was shut in, although production volumes reportedly picked up by 0.1mbpd to 10.2mbpd in May.
‘‘Amid these developments, average Brent crude oil price rose 5.9% Month-on-Month, MoM, to $110.56 per barrel. (May 23, 2022) from $104.44 in April.
“Despite the uptick in oil prices, Nigeria’s external reserves fell 2.6% MoM to $38.5billion (May 27, 2022) while Naira weakened against the Dollar in the FX markets. Rates rose 0.1% and 3.1% MoM to ¦ 419.50/$1.00 and ¦ 608.00/$1.00 at the Investors’ & Exporters’ (I&E) Window and parallel market, respectively.
“We attribute the synchronised pressure on the foreign reserves and the market rates to FX supply-demand imbalance. This position is reflected in the turnover of Dollar traded at the I&E window as activity level fell for the second consecutive month by 12.3% to $2.4billion in May. ‘‘In June, we expect the Naira to trade within a tight band across different market segments with the CBN sustaining the weekly FX interventions.”
However, analysts at Financial Derivative Company (FDC) expressed optimism that the downward fortunes of the Naira will be reversed this month.
In their review of the forex market in May they said: “Exchange rate averaged N417.53 per dollar in the Investors and Exporters window in April.
“It depreciated by 0.24 percent when compared to the average rate of N416.53 per dollar in March.
“It traded around N416.17 – N419.5 per dollar range in April. Likewise, the exchange rate depreciated by 1.09 per cent to an average of N588.47 per dollar in April from N582.13 per dollar in March.
“In the same vein, the Naira depreciated by 0.25 per dollar from N418 per dollar at the beginning of May to N419.03 per dollar on May 20th at the I&E window.
“The currency also depreciated by 3.57 per cent at the parallel market to close May 20th at N608 per dollar from N589 per dollar at the beginning of May. The Naira depreciation is mainly fuelled by increased demand pressure in the forex market.
“The exchange rate is expected to appreciate in the near term as the increase in interest rates is expected to encourage foreign portfolio investment and reduce demand pressure.
“Rates are expected to trade around N416.5 per dollar N417.5 per dollar on the I&E window, while rates could appreciate to N595 per dollar in the parallel market in the near term.”
