Early days in the new Interbank forex market, important to make a few points to satisfy the traders here asking tons of questions.
1. This is simply a market, a market is made up buyers of produce and sellers of produce, in the case US Dollars is the produce
2. The CBN says the Naira is floated, that the price of a United States Dollar USD will now be determined by the interplay of demand and supply, thus if supply of dollars to the market goes up, the price (exchange rate to Naira) of the Dollar will fall. Vice versa.
3. Thus let’s assume, yesterday’s closing price was N280 to $1 and the traders on the Interbank market want $100m and bid for supply of USD at N280. If CBN supplies say $150m to the Interbank market, the price of dollars will start to fall. It will reduce from N280 to say N270…. why? because there is sufficient supply and traders know even at $250 they get supply.
4. However, if the market wants $100m and CBN supplies only $90m then the price of USD will go up as traders will increase their bids to say N290 to ensure they get the scarce dollars.
5. Thus it’s the supply of dollars to this market that is key, it’s the supply that determines the exchange rate.
6. Now the market was funded 100% by the CBN, all requests made by traders to the market was supplied, however there is one problem, there was only one supplier, the CBN
7. CBN strategy is simply. Removes all restriction, and the oil companies, the Foreign portfolio investors, the families remitting USD to Nigeria will send USD to Nigeria via that market. As supply to that market is sustained, the pressure on the CBN Foreign Reserves will lessen. In effect, CBN can take Dollar to N100, by ensuring supply to the interbank market with dollars.
So so questions
a) What if remittances dont come in? in sufficient quantities to meet demand in the market? a market is only as good as its supply
b) What if the FPI boys want a devaluation, they simply withhold dollars, making the dollar price to rise?.
c) What about the 41 banned items? Lets be clear, the 41 item importers wont go to the parallel market to get their dollars, they will attempt to fund via the interbank window will pay a premium and get it, why? Its cheaper on the interbank market.
Analysis
What will now happen is that the parallel market will supply importers with dollars that cannot be obtained from the Interbank market, in effect, the parallel market will be at a premium to the interbank rate. Thus there will be a spread between the parallel market and the interbank rate.
Thus traders will watch this rate, If the spread widens, they go long on dollars hoping to ride a dollar rally, If the spread narrows, they short dollars, in anticipation of a stronger Naira.
You should watch it as well
As always I issue a full disclaimer, speak to you own financial adviser before making any investment, this is not an advise to sell or buy any financial asset or currency, currency trading is very very risky and you can lose all your invested capital.BN
