Nigeria’s Forex Futures Market Stalls Amid Fluctuations in Naira

Over a month after the Central Bank of Nigeria (CBN) floated the Naira at the forex market, the country’s exchange-traded futures market has come to a standstill as wide fluctuations in the local currency deter trade.

On Monday, the Naira exchange rate to the Dollar experienced a drop of N14.22, reaching N792.04 to the Dollar at the official market. Additionally, the average Naira to Dollar exchange rate in the Bureau De Change window of the official market rose to N847.02/$1, up from N823.3/$1.

Similarly, the black market average rate for the Naira to Pound reached N1103.9/£1, an increase of N29 compared to Friday’s rate of N1074.9/£1. The Naira to Euro rate also closed higher at N952.5/€1, with the cost of the European currency rising by N22.94 kobo.

To improve liquidity, the CBN removed trading limits on oversold foreign-exchange positions and permitted hedging of short positions through over-the-counter futures. However, the futures market has failed to gain significant traction due to low appetite, as noted by Rand Merchant Bank.

Traders are hesitant to buy or sell Naira futures as they remain uncertain about the final settling value of the Naira. The lack of clarity around price discovery impacts the appetite for futures contracts, according to Tajudeen Ibrahim, head of research at Chapel Hill Denham in Lagos.

The CBN aimed to increase capital inflows and clear a backlog of dollar demand by easing exchange controls and devaluing the Naira by about 40%. However, inflows have yet to show significant improvement as investors adopt a “wait and see” approach to gauge the government’s commitment to the new policy.

Foreign investors have been cautious, selling more stocks than they bought in June, with outflows doubling from May as they took advantage of the devaluation to exit long-held positions. Kayode Omosebi, a banking analyst at Asset & Resource Mgmt Co Ltd in Lagos, suggests that an increase in the futures market will likely occur when significant inflows, particularly portfolio inflows, are witnessed.

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