Idris Ahmed With Agency Report
2 January 2012
The naira closed for the year 2011 at a five week high, but it was 4.46 percent down on its opening level at the start of 2011, as months of dollar demand pressure took their toll on the local currency, traders said.
The naira closed at 159.10 to the dollar on Friday, its strongest since November 25, traders said. But that was down 4.46 percent on the N152 to the dollar on which it opened the year.
Dealers said the naira closed stronger on the interbank on market last week because of increased dollar supply from direct central bank sales and sales by a local unit of Royal Dutch Shell to some lenders.
They said the market closed early on Friday to enable banks prepare their books for the year end, but increased dollar supply provided support for the local currency and signalled hope the central bank may be willing to defend the naira in the new year.
“The central bank direct dollar sale to some banks at the last minute is seen as a signal of its intention to defend the naira within its trading band in the coming year,” one dealer said.
The central bank moved its target trading band for the naira on November 28 to +/-3 percent around 155 naira, from +/-3 percent around 150, owing to prolonged naira weakness and high dollar demand.
At one point in the year the naira weakened to as low as 168 to the dollar on the interbank market, as some importers brought forward their obligations to hedge against future depreciation of the currency.
The IMF said the currency is overvalued in February and seek greater flexibility in the exchange rate management, spooking the markets.
“The market decided to price in the IMF concerns on the naira, especially seeing that foreign reserves are consistently declining despite the huge revenue accruing from rising oil prices,” one trader said.
Dealers said the naira decline was further aided by the frequent inability of the central bank to meet all demand at its bi-weekly auction subsequently, fuelling speculation the regulator might have to revalue its target rate.
In moves to prop up the naira, the central bank hiked its benchmark interest rate six times and excluded some gasoline importers and airline operators from buying dollars from its bi-weekly forex auction to reduce demand pressure.
“None of the central bank measures to curb demand for the (dollar) effectively addressed the supply gap in the market. The point is that there was latent demand from importers, especially fuel dealers, so the naira simply fell under such pressure,” a currency dealer told Reuters.
Traders said an early signal for the naira outlook in the new year will be the ability of the central bank to meet all dollar demands at its first auction on January 4, when the official foreign exchange market is expected to reopen.
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