Spot transactions fall by $955.7m despite a 65% jump in derivatives, while naira demand tests the impact of CBN intervention….
Nigeria’s foreign exchange market suffered a sharp decline in trading activity in the week ended October 2, with total turnover across the spot and derivatives segments falling 35.41 percent to $1.697 billion.
The latest figure, contained in the FMDQ FX Market Report published on October 4 compares with the $2.63 billion recorded in the previous week.
The decline was largely driven by a steep contraction in spot transactions, which more than offset a strong increase in derivatives trading during the period.
Average daily foreign exchange turnover also fell to $424.24 million from $525.43 million, representing a decline of about 19.3 percent.
The latest drop marks a reversal of the gradual recovery recorded in the preceding two weeks, as renewed demand for foreign exchange put pressure on the market despite a $100 million intervention by the Central Bank of Nigeria.
The spot segment remained the dominant component of Nigeria’s foreign exchange market, but its performance deteriorated significantly during the week.
Spot turnover fell 36.93 percent to $1.632 billion from $2.588 billion in the previous week, representing a decline of $955.70 million.
Average daily spot transactions consequently dropped to $408.06 million from $517.59 million.
The contraction also reduced the spot market’s contribution to overall FX turnover to 96.19 percent, compared with 98.51 percent previously.
Turnover in the derivatives segment, which comprises FX forwards, increased 65.09 percent to $64.73 million from $39.21 million.
Average daily derivatives turnover more than doubled to $16.18 million from $7.84 million, pushing its share of total market activity to 3.81 percent from 1.49 percent.
Despite the sizeable percentage increase, derivatives remained a relatively small part of the market. In practical terms, about $96 out of every $100 traded during the week was in the spot market, while derivatives accounted for less than $4.
The renewed demand for foreign exchange came despite efforts by the Central Bank of Nigeria to support liquidity in the market.
The apex bank injected $100 million during the week, while Nigeria’s gross external reserves increased by $62.17 million to $54.93 billion as of September 30.
The naira’s forward-market performance, however, presented a mixed picture.
The currency weakened marginally in the one-month forward contract, losing nine basis points to close at N1,350.62 per dollar.
It strengthened in the longer-dated contracts, gaining four basis points to N1,385.61 per dollar in the three-month tenor, 28 basis points to N1,434.30 in the six-month contract and 78 basis points to N1,529.80 in the one-year tenor.
The latest reserve figures also extend the improvement recorded in September. Nigeria’s gross external reserves rose by $1.114 billion during the month, from $53.806 billion at the end of August to $54.920 billion.
Over the same period, the naira appreciated by N3.78 at the official foreign exchange window, closing September at N1,329.16 per dollar.
The weakness in FX turnover also comes against the backdrop of a major shift in monetary policy.
On September 22, the CBN’s Monetary Policy Committee cut the Monetary Policy Rate by 350 basis points to 23 percent, its largest recent adjustment, while maintaining tight liquidity conditions through aggressive open market operations.
The central bank conducted five OMO auctions during September, with approximately N17.5 trillion in bills allotted as it moved to absorb excess naira liquidity.
The combination of lower interest rates and tighter liquidity could have implications for foreign portfolio flows, which have remained an important source of foreign exchange supply.
What comes next for the FX market?
For now, the sharp fall in spot turnover stands out more than the surge in derivatives activity.
The 65 percent weekly increase in derivatives trading was not enough to prevent overall FX turnover from falling sharply, underscoring the continued dominance of the spot market in determining trading volumes.
The coming weeks will therefore provide a clearer indication of whether the latest decline was simply a temporary slowdown or an early sign of softer FX activity following the CBN’s interest-rate adjustment.
For the naira, much will depend on the strength of foreign exchange inflows, investor positioning and the ability of the market to maintain adequate dollar liquidity as the yield advantage on Nigerian assets gradually narrows.
