Pressure on the parallel market rate: moderation in sight?


Thusdaydaytime, Novemberber 19, 2020 / 09:27 AM / by United Capital Research / Header image credit: Godfreytimes

HearYesterday this week, the parallel market rate depreciated to N475 / $ 1 – its lowest level in 12 weeks – due to the inability of the official market to meet the huge backlog of demand from manufacturers, traders and foreign investors seeking to repatriate capital. Since September, the CBN has allocated more than $ 1.0 billion to BDCs in an attempt to inject more liquidity and ease demand pressures, according to media sources. However, the volatility in the markets remained unchanged.

The recent pressure on exchange rates is attributable to a number of factors: First, the legitimate demand for foreign exchange by manufacturers whose obligation to their foreign suppliers continues to increase. In addition, the high demand for dollars appears to be driven by imports linked to the holiday season in anticipation of the Christmas sales as well as by demand linked to year-end travel. Finally, speculation from market participants who expect the Naira to depreciate even further continues to weigh on the parallel rate.

In our view, the current pressure on exchange rates is likely to continue until the end of the year, with festive import demand increasing through December. We note that the CBN’s restrictive policies, aimed at reducing demand, may end up hurting businesses and putting demand pressure on the parallel market even more. This can further widen the gap between official rates and parallel market rates. Thus, any moderation in parallel market rates will depend on a fundamental shift in the factors currently affecting supply: low oil prices and a shortage of foreign capital inflows into the country.

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