CBN committee blames forex market volatility on seasonal dollar demand

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has attributed the recent volatility in the foreign exchange market that led to the recent depreciation of the Naira against the dollar to “seasonal demand” for the dollar.

CBN Governor Yemi Cardoso, speaking on behalf of the committee during Tuesday’s Monetary Policy Committee (MPC) meeting, stated that such volatility is observable in any functioning foreign exchange market globally.

According to Cardoso, the CBN is committed to maintaining a transparent foreign exchange market through a willing buyer and willing seller model, noting that depreciation is simply a reflection of the interaction between demand and supply.

“Members further note the recent volatility in the foreign exchange market and attribute it to seasonal demand, a reflection of the interaction between demand and supply in a functioning market system,” Cardoso said.

Background

Recently, the Naira has seen a retreat in its gains against the dollar in the official and parallel markets, falling below N1,500/$1 at some point.

For example, The Naira to Dollar exchange rate hit an intraday high of N1,515 last Monday. according to data from the FMDQ, where the currencies are officially traded.

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The last time the intraday high crossed the N1,500 mark was on March 21, 2024, when it closed at N1,598/$1. It has since traded below 1,500 naira.

However, the naira reported a rally above N1,500/$1 this week.

In the parallel market, the naira strengthened significantly, trading at 1,490 naira to the dollar. The naira appreciated by 1.34% from the value of N1,510/$ seen on Friday.

What BDC Traders Say

For his part, a senior official from the Association of Exchange House Operators (ABCON), who preferred to remain anonymous, shared with information from Nairametrics on the ongoing depreciation of the Naira, stating that lack of supply was a major factor that caused the depreciation.

The ABCON official emphasized that the central role in the depreciation does not lie with the BDC operators but with the CBN’s diminished dollar allocations.

“Last time the CBN provided dollars only to about 30% of authorized operators,” he explained, highlighting the challenges this poses for the rest.

“With insufficient allocation from the CBN, BDCs are forced to source dollars at higher rates from the parallel market, significantly impacting the rates they offer to customers,” he said.

In case you missed it

Nairametrics recently reported that the CBN raised the benchmark interest rate by 150 basis points to 26.25% from 24.75%.

This was stated by CBN Governor Cardoso in the press conference following the bank’s 295th MPC meeting.

Additionally, the bank maintained the cash reserve ratio (CRR) of deposit money banks (DMBs) at 45% and placed the asymmetric corridor around the MPR at +100 and –300 basis points.