Nigeria Dollar Dealers Stop Trade on Central Bank Rule

Dec 18, 2014/Bloomberg

Nigerian foreign-currency dealers halted trading after a central bank rule change meant to limit speculation against the plunging naira confused investors.

“This raises concerns about the credibility of the central bank,” Kevin Daly, senior portfolio manager at Aberdeen Asset Management Plc, said by phone from London. “If it was their intention to stabilize or see some appreciation of the naira, it’s backfired.”

Bid and ask prices for the naira were quoted from 162 to 190 per dollar with only 16 trades by 1 p.m. in Lagos today, compared with more than 170 by the same time yesterday, according to data compiled by Bloomberg. The naira fell 12 percent against the dollar this quarter, the worst among 24 African currencies tracked by Bloomberg after Malawi’s kwacha. Investors dropped Nigerian assets as the outlook for Africa’s biggest oil producer worsened with Brent crude prices almost halving since late June.

The Abuja-based regulator met currency traders about a circular issued on its website today that cut banks’ maximum foreign-exchange net-open position to zero of shareholder funds by the end of each business day from 1 percent. Interbank naira trading ground to a halt, according to Samir Gadio, head of African strategy at Standard Chartered Plc. The central bank later updated the circular to say the change was temporary.

Currency Speculation

“Banks have to sell all dollars they buy from the market, not to keep them until the following day,” Deputy Central Bank of Nigeria Governor Sarah Alade said by phone from Abuja. “It is to ensure dollar liquidity. We have noticed some dealers speculating on the currency because of the pressure from declining oil prices.”

The currency weakened less than 0.1 percent to 187 per dollar. The circular may unnerve investors holding naira assets if they think it will be followed by stricter measures, such as a cap on the interbank exchange rate, Gadio said by phone from London.

“It effectively shuts down any trading activity on the interbank market,” he said. “The market might wonder if this is the first step and there’s something else coming next.”

The central bank raised interest rates to a record 13 percent last month to protect the currency and its foreign reserves, down 19 percent this year, while Finance Minister Ngozi Okonjo-Iweala proposed an 8 percent budget cut yesterday.

Don’t Panic

Lenders will still be able to buy dollars on the interbank market if they have orders from customers needing to import goods and services, Gadio said. The central bank will continue to support the naira with sales of dollars in the interbank market, Alade said.

“The banks can’t stop trading because of the circular,” she said. “It is not supposed to close the market. We have told them we’ll continue intervening in the market, so there is no need to panic.”

Aberdeen Asset Management cut its naira holdings completely over the last two months and has no immediate plans to re-enter the market as the currency could fall further, Daly said.

“I’m happy to sit on the sidelines and wait to see it go higher against the dollar,” he said. “We’re getting to 200 quicker than I expected. But if someone called me right now and said they’d offer me 200” naira for each dollar, “I’d say no,” Daly said.

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