CBN to Fund $697m Forward Contracts Friday, Naira Pressure to Ease

Obinna Chima

The Central Bank of Nigeria (CBN) will today fund the one-month forward contracts of $697 million on the interbank FX market, effectively improving dollar liquidity in the market, as the accounts of customers that hedged against the dollar through their banks last month will get their accounts credited.

Sources in the CBN confirmed that there would be improved availability of dollars today, thus easing pressure on the naira which fell to its lowest level yesterday since the guidelines were revised last month for trading on the interbank FX market. The naira closed at N310.43 to a dollar yesterday, compared to N294.24 to a dollar from the day before.

Financial market dealers attributed the development to scarcity of FX since the CBN decided to stop its intervention and all the currency to be truly market-determined.

But on the parallel market, the naira did not budge, as it remained unchanged at N375 to a dollar yesterday.

Bank customers who bought the forward contracts will be expected to make a gain of more than N20 to the dollar, given that at the time the bids for the forwards were made a month ago, the naira exchanged for about 282 to the dollar.

On the first day of trading under the revised rules for the interbank market on June 20, the CBN had intervened in the market through the Special Secondary Market Intervention Sales (SMIS) to clear the backlog of $4.02 billion pent-up demand for FX.

According to the CBN, it sold $532 million on the spot market and $3.487 billion in the forwards market.

A breakdown of the $3.487 billion forward sales by the central bank showed that $697 million was for one month (1M), $1.22 billion for two months (2M) and $1.57 billion for three months (3M).

A forward contract is a customised contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract can be used for hedging or speculation, although its non-standardised nature makes it particularly apt for hedging against price movements