Mixed reactions trail CBN’s closure of retail, wholesale FOREX auction windows

Godwin Emefiele, CBN governor

Capital market analysts on Thursday reacted to Wednesday’s decision by the Central Bank of Nigeria to shut down the bi-weekly retail/wholesale foreign exchange auction windows, making the interbank market the reference foreign exchange market.

While FBN Capital, the FBN Holdings subsidiary, hailed the decision as “bold and necessary step” to save the national currency, amid continued pressures from declining global crude oil prices, Renaissance Capital research said it amounted to a tacit devaluation of the Naira, which will not end the weakness of the currency.

Others were of the view that the CBN decision would definitely curb the risk posed by JP Morgan, which threatened recently to throw Nigeria out of its key emerging currency bond index, as a result of dwindling FX reserves, which called to question the country’s current credit ratings.

Yet, other analysts said the CBN runs the risk of the new policy failing to meet outstanding demand in the interbank market, leading to volatility.

Details of Nigeria’s foreign reserves showed a balance of $32.7 billion at the beginning of the week, about 18 per cent below the levels attained in the corresponding period in February 2014.

As at December 2014, the CBN had invested about $2.3 billion in defending the Naira against incessant attacks from unrestrained foreign exchange speculative trading and the slump in oil prices.

In spite of its intervention, there was hardly any let up, as the pressure pushed the CBN to shift the demand of rDAS to the interbank market, effectively minimizing CBN’s role as the prime market maker.

According to FBN Capital analysis, the move is a necessary one towards ensuring that the Naira stabilizes and reflects demand and supply dynamics, and should assist in improving market depth and efficiency.

It noted that the closure would effectively end round-tripping, speculative demand, rent-seeking and spurious demands for foreign exchange.

Despite CBN’s repeated assurances that the Naira was appropriately priced, the market analysts said the market had waited for a long time for adjustment to the foreign exchange rate.

As long as the CBN continues to intervene to meet legitimate demands for foreign exchange, it said the rate should continue to hold at the current level, even with the expected spill over demand from the rDAS.

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