How the naira dips are affecting Forex trading

By solacebase.com On Sep 30, 2023

naira , forex trading, CBN — How the naira dips are affecting forex trading

By Sunday Abegunde

This past summer, Nigerian President Bola Tinubu made the decision to have the long-standing currency peg on the naira removed. For some time, this peg has essentially set the listed value of the naira, mandating that foreign exchange occurs at specific, pre-determined rates, which were sometimes inflated for certain imports.

With Tinubu’s decision, however, the Central Bank Nigerian (CBN) lifted the peg in June, officially freeing the naira’s value to be determined by market forces. The move is intended to strengthen Nigeria’s position in industry-level foreign exchange transactions, and eventually heal the economy.

Its immediate impact, however, included local currency depreciation that was both swift and significant; at one point, the value of the naira against the U.S. dollar fell by nearly 6% in a single day.

Since those early days, the value of the naira has rebounded somewhat. That said, it remains well below what it was before the value peg was removed. Furthermore, there has been notable volatility along the way, with minor rebounds and subsequent dips occurring repeatedly. This is not unexpected given that the forex markets and international trade are finally getting the chance to determine the naira’s value in a natural fashion. Nevertheless, it may take some time either for said value to settle or for it to regain its heights from before the Central Bank’s maneuver.

Read Also: Full list of CBN govs since 1958

While the naira should be allowed time to settle, however, its fluctuations will continue to affect forex trading on a daily basis. So how exactly are the dips and volatility affecting forex traders, and why should this matter to Nigerians on the whole?

Among those investment platforms are several that accommodate forex trading as a means of private investment. These apps support trades 24 hours a day, 5 days a week, and boast “better-than-market” conditions guaranteeing updated rates and rapid transactions.

Furthermore, they educate investors on currency history and movement, and provide tools – such as leveraged trades and stop orders – that both simplify forex trading and maximize its potential.

The reason this question is of particular importance is that beyond industry-level foreign exchange, Nigeria has also become a busy region for private currency trading. In large part, this has been chalked up to the growing numbers of Nigerians who are both connected to the internet and inclined to conduct financial transactions on it.

Thanks primarily to smartphone penetration among the country’s youth, data in 2022 indicated that roughly 50% of the Nigerian population – some 104.4 million people – are now connected to the internet. Furthermore, about 19 million new users got connected between 2020 and 2021, which is good for roughly 22% growth from year to year. This growth is widely expected to catapult ecommerce, fintech, and cashless payments to new heights throughout the country. Relatedly, however, increased connectivity and comfort with digital finance has also yielded more exposure to electronic and mobile trading and investment platforms.

In short, what this means is that millions upon millions of Nigerians who are connected to the internet and comfortable with digital transactions now have touchscreen access to full-fledged electronic forex brokers. As a result, Nigeria is now mentioned regularly among the busiest forex trading markets in Africa.

A few hundred thousand of those consumers at least are believed to be active in the forex markets, which means that those few hundred thousand stand to be affected by dips and volatility in the naira’s value.

That covers why the naira’s volatility and free-standing in the market matter not only to the Nigerian economy as a whole, but to individual forex investors. But it also begs the question of whether or not those investors stand to benefit from the new conditions. There is no sweeping or all-inclusive answer to that question. However, there are some potentially positive factors worthy of consideration.

End of Parallel Markets

One of the major issues with the pegged naira was that it allowed for both manipulation and, by extension, black markets. At the state level, the naira’s value was at times inflated in order to draw more wealth out of certain international imports. On the ground level, however, there were known to be black market currency dealers manipulating value for their own gains.

These issues made for uncertain conditions for forex traders. With the naira no longer pegged, however, its value is constantly being determined and honed by transactions – which has made it easier to determine whether a listed price is fair and up to date.

Reason for Confidence

As alluded to regarding the end of parallel markets, market-determined forex rates move Nigeria closer to flexibility and transparency regarding the value of the naira. Beyond helping traders to identify fair prices, however, this also stands to improve investor confidence.

In short, when they are aware that prices are fairly determined and accurately listed, traders can be more certain that their forex transactions are safe and reasonable.

Attraction of Foreign Investment

With the naira’s peg removed, and the value having depreciated, the expectation is that foreign investment will ultimately pick up in a meaningful way. Trade partners know that they can now get more for their money than they could when the value of the naira was being artificially propped up, or at times even inflated.

At the same time, however, increased investment and trade activity from those partners could ultimately lead to the naira’s value climbing back up over time. There are no guarantees, but it is for this reason that some expect a forex investment in the depreciated naira to have some long-term potential to pay off.

Ongoing Opportunity from Fluctuation

Last but not least, it is also worth considering that volatility means opportunity in forex. Unlike in other markets, forex traders don’t necessarily hold onto their investments for long periods of time. Rather, they often conduct smaller trades in a shorter time, seeking to capitalize on day-to-day fluctuations rather than long-term swings.

For this reason, even a depreciated asset can offer value, so long as it remains volatile. The spikes and drops of the naira over the last several months have provided opportunities, and so long as fluctuation continues, similar opportunities will remain.

The long-term effects of the change in naira policy remain unclear. Change is still coming to the Nigerian economy and the extent to which the Central Bank has helped that economy won’t be understood until more time has passed. What is clear, however, is that with the forex market becoming continually busier throughout the country, individual traders will be affected every bit as much as the broader economy. There are ways in which the naira’s dips and fluctuation may benefit savvy forex traders.

Those same traders would do well to operate carefully and strategically, however, because there are no guarantees in currency exchange.