June 16 (Lagos) - Yesterday, the Central Bank of Nigeria (CBN) provided clarity on the flexible naira policy adopted at the May 2016 MPC Meeting with release of guidelines on the new market architecture. In the new currency regime, the USDNGN would trade fully floating under a single structure in the autonomous/inter-bank with no guidance on naira range.
In addition, the apex bank can intervene in the markets via 2WQ with FXPDs as a market participant with no guidance on bid-offer spread range as in the past.
Exit CBN, enter autonomous flow: Given long-held views of analysts at Asset & Resource Management Ltd in Ikoyi about the need for the CBN to end the arbitrary determination of USDNGN in favour of a system of price discovery via market forces, yesterday’s decision to completely abandon the idea of a Naira peg, as against taking an easier route via devaluation can be viewed as a positive.
Thus, going forward, the key positive from CBN’s shift, is that autonomous flows, which now account for more than half of dollar inflows into Nigeria, would now exert greater influence on NGN determination.
Fundamental concerns underpin downside in USD/NGN: Under the new currency market, Naira trajectory should reflect demand and supply forces which in this case should mirror movement in underlying fundamentals in the current account. Over the near term, autonomous flows are unlikely to be sufficient to plug current account deficit and demand overhang in the inter-bank market.
Updating our framework of calibrating current account balances and parallel market premiums to our exchange rate forecasts, analysts at Asset & Resource Management Ltd in Ikoyi see scope for a wider down-leg in exchange rate from the 25-30% in our prior forecasts to a 40-45% under the new system.
reporting for easykobo.com on Thursday, June 16 2016 from Lagos, Nigeria
Source - analysts at Asset & Resource Management Ltd in Ikoyi