If you ask someone today to choose between being paid in dollars or naira, there will only be one winner. Since the drop in oil prices in early March and the COVID crisis-19 virus, the exchange rate between the naira and the dollar has depreciated in multiple official and unofficial markets where currency can be bought.
On the black market, the exchange rate sells for an average of 460 N / $ 1 (like this week) and should increase depending on who you are talking to. In the NAFEX market where forex is sold by exporters and investors, the exchange rate is closer to N388 / $ 1 oscillating between a band plus or minus N2. As recently as last week, the CBN informed the market that the SMIS window where forex is sold to importers and traders as the new floor for buying forex in N380 / $ 1. The exchange rate at the official CBN window remains N360 / $ 1.
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This reinforces the growing calls for the unification of the variexchange rate windows. The market wants a single, uniform rate. It’s easy to see why. Nobody wants to be on the losing side if a repeat of 2017 occurs. In case you forgot, the exchange rate was very volatile in the parallel market up to N505 / $ 1 before collapsing to N366 / $ 1 a.near the CBN introduced the NAFEX window. Many people lost money when the naira converged to this rate. You are not in this boat if history repeats itself.
This is why speculating on the exchange rate between the naira and the dollar can be a brutally risky exercise made worse by multiple exchanges.nges windows in the country. Buy to N460/ $ 1 today and hold like most of the uninformed speculators often do and the multiple exchange windows are bundled into one at 388 N / $ 1, as the central bank governor alludes, things could get very risk. If the unification of the stock exchange frees up liquidity in the market rate and it holds at 388 N / $ 1, the parallel market rate is very likely to follow. Those on the other side of the trade looking to converting their dollars (bought at N460 / $ 1) into naira will be badly burned.
Perhaps a consolation is that as long as Nigeria continues to be dependent on imports, it is only a matter of time before the naira depreciates against your purchase price. Between 2012 and 2017, the naira depreciated by 30% compounded annually. You probably just have to wait another 2-3 years and you will recoup your losses. But the same cannot be said of anyone with an investment in dollars and looking to convert to naira. The the burn can be severe.
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For example, you buy $ 1,000 to N460 and invest in an asset that should earn you 10% or $ 100 in profit. If, when you liquidate your $ 1,100 and the to exchange the rate increased to let’s say N400 your $ 1100 is now N440,000 compared to the N460,000 it cost you when you bought $ 1,000. The foreign exchange loss has practically wiped out your profits and part of your capital.
Trading in forex is extremely rewarding but also very risky. Don’t be fooled into believing that it just goes up, things can go down faster than You can imagine. The market will always deliver bigger fools.