Widening FX divergence raises concerns among forex traders

Widening FX divergence is causing concern since it suggests that demand for forex is on the parallel market, which is deemed lower in size to the investor and exporter window.

According to market observers, the cause for the increasing difference could possibly be related to the black market’s ability to meet demand.

The official I&E window recorded a closing exchange rate of N742.31 per US dollar compared to the N780/$1 average sold at the parallel market, representing the largest disparity or divergence between the official and parallel market rates recorded since the revised I&E window was launched.

The market opened at an exchange rate of N764.31/$1 and sold for an intra-day high and low of N820/$1 and N600/$1 respectively. It, however, retreated to close at N742.31/$1, which was stronger than the N768.44 price recorded on Tuesday, July 4th.

The amount of foreign currency transacted at the I&E window also increased by 21 per cent to $89.37 million, reversing the previous two trading days’ drop in forex turnover.

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In the unofficial parallel market, the naira fell against the dollar, ending at N780/$1 on Wednesday.

This represented a 0.78% decrease from the previous day’s rate of N774/$1, as well as a N38 divergence from the official exchange rate.

The P2P market, which allows for the exchange of dollars for cryptocurrency, had an exchange rate of approximately N787.5/$1.

Most traders appear to be watching activity in the investor and exporter window, which is still seeking to re-establish itself as the official destination for currency trading.

Meanwhile, the FMDQ revised the computation methodologies of its foreign exchange (FX) rate-fixing products, effective from Wednesday, July 5, 2023. The move is likely to impact how the exchange rate is determined going forward.

According to a market notice issued by FMDQ Exchange, the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) and the Investors’ and Exporters,’ (I&E) FX Window Spot Rates will now be calculated using actual FX market transaction data, rather than indicative quotes from market participants.

Previously, rates were decided by quotes submitted by traders rather than real deals.

The indicative quotation approach is vulnerable to manipulation since it may not fully reflect the actual price at which a trade was completed.

Analysts opine the changes are anticipated to have an immediate influence on how foreign exchange currency rates are established.

When traders realize that the closing rates are not simply rates but are based on actual trades, the effect of demand and supply on prices will also aid price discovery.