Flexible FX framework rolled out
Monetary Policy Decision
Flexible FX framework rolled out
In response to the unanimous decision of the Monetary Policy Committee (MPC) to adopt a flexible exchange rate policy in a bid to enhance efficiency and facilitate a liquid and transparent Foreign Exchange (FX) market, the Central Bank of Nigeria (CBN) released a revised guidelines on the operations of the Nigerian Inter-Bank FX market towards the liberalization of the market. Contrary to earlier guidance at the May MPC meeting that the CBN will maintain a window for “critical†transactions in raw material and machinery imports targeted at boosting local production, a single market structure will be operated through the autonomous/inter-bank market. The CBN may, at its discretion, participate in the FX market through interventions directly in the inter-bank market or through dynamic “Secondary Market Intervention Mechanisms†– sale to wholesalers and end users. Furthermore, the CBN will introduce registered Authorized Dealers (FX Primary Dealers) designated to deal on large trade sizes (minimum $10 million) on a two-way quote basis. With no indicative rate specified, the interbank market is expected to trade largely based on the forces of demand and supply with intermittent interventions by the CBN.
Markets to rally as Naira gives way to price recovery
With the kickoff of the new framework slated for Monday, June 20, it remains unclear where the rate NGN/USD will open. Given significant pent-up demand amidst depleting foreign reserve ($26 billion), we foresee sizeable weakness from the current NGN199/USD rate. We recall that financial markets had rallied shortly after the decision of the MPC to introduce a flexible exchange rate. Now that the framework has been revealed, we expect the markets to trade higher in the coming sessions (NSE ASI up 317bps yesterday supported by a late rally). That said, we believe the market will require other fiscal policies to complement the monetary decisions in a bid to sustain investor sentiment.
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