Hedge Fund speculators in Nigeria’s forex market may be forced to cut their current bullish bets on naira devaluation as no much surprises are expected from the country’s apex bank on both the policy rate and the naira exchange rate.
The fourth Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN) will be holding this week (Thursday and Friday) amid the backdrop of incessant pressure on foreign exchange (FX) rate, creeping inflation, slowing GDP growth and the US Fed’s decision to hike rates.
But some analysts say that the meeting may maintain statusquo, given the continued pressure on the local currency and worsened by rising inflation, currently at 9.2 percent
Recently, many offshore money managers, formed typically to engage in ‘gambling’ using credit or borrowed capital, have increased their net-long position on possibility of naira devaluation but the Central Bank of Nigeria (CBN) in a latest but criticised move, only created forex eligibility list for imports, saying it is the best way to take pressure off the naira.
Investment analysts see hedge funds insisting on taking an offsetting position in the current exchange rate of the naira, in order to balance gains and losses to the underlying asset.
Victor Ogiemwonyi, Chief Executive Officer, Partnership Investment Company plc said “the parallel market should first get to its highest and let speculators sweat a little. Let us wait for the U.S. FED rate hike and let’s see how long those Hedge Fund speculators will be able to hold out. They are betting on the naira being devalued.”
Since Nigeria’s headline inflation in June picked up from 9 percent year-on-year (y/y) to 9.2percent, analysts foresee the impact of the weaker currency on the core inflation.
Sewa Wusu, head, research and investment, Sterling Capital, had said the “onus lies on the CBN to devalue the naira before it is too late.” Wusu said, “The market is reacting to the expected devaluation of the naira, which ought to have been done before now. What is actually pushing the naira southward is the banning of 41 items from the forex market”.
The naira fell further to a new record low of N244 to the dollar at the parallel market last weekend, as dollar shortages persisted, foreign exchange dealers said. The currency, however, ended at 196.95 against the dollar on the official interbank market. At the FMDQ OTC market, the naira closed at 197.50 against the dollar.
“Headline inflation is now above the top of the CBN/MPC range of between 6% and 9%. This would normally be ground for monetary tightening, particularly as core inflation has increased for six successive months.
“The MPC next meets on 23 and 24 July. We would not be surprised if it holds fire on both the policy rate and the naira exchange rate. Real yields across the curve are now close to six percentage points. However, devaluation fears are discouraging the offshore community from re-entry,” research analysts at FBN Capital plc said.
With the MPC meeting due this week, “we expect investors to stay cautious and carefully monitor market movements, as meeting outcomes will likely play a key role in shaping market direction over the near term,” said research analysts at Lagos-based United Capital plc.
The Central Bank of Nigeria (CBN) recently stopped foreign exchange (FX) sale to importers of 41 items, a development Commerce and Industry stakeholders say might lead to the closure of many manufacturing companies in the country.
The Lagos Chamber of Commerce and Industry (LCCI) says many of the listed items are raw materials, which manufacturing companies need for production. In a communiqué it issued after a public forum with officials of the CBN recently in Lagos, LCCI said the policy might lead to job losses.
According to Ogiemwonyi, “The CBN is on the right course. They should not allow themselves to be blackmailed. Those who are importing machinery and raw materials for manufacturing should be given priority.
“Creating a forex eligibility list for imports was the best way to take off pressure from the naira – and the best way to devalue the naira without saying so. We need to wean ourselves of frivolous imports.
“Let non essential goods price themselves out of the market. The CBN should not change their current policy. It has the potential to stabilise the market. They should clear the market in one scoop but that time has not come. If we are patient to see this policy through, the naira will stabilise around a mid point between the official rate and the speculative rate.
“It will serve the economy better. We have no need to defend the naira. Spending some $100bn in the last five years saving the naira and still have it trading above N240, shows we are fighting against gravity.
“Let the naira find its level. But first, let them lose their shirts. There should be no haste to devalue , we have not gotten to the bottom yet. We will determine when to devalue, those speculating against the naira should not guide our decision.”
Iheanyi Nwachukwu
