Naira forwards rose to record highs and volatility surged on Monday following the removal of a limit on bid-offer spreads by the Central Bank of Nigeria on Friday.
The development raises expectations that the naira is set to extend declines as it trades more freely, according to a Bloomberg report.
Three-month non-deliverable forward contracts jumped by 4.1 per cent to a record N329 per dollar, while contracts maturing in a year rose by 3.3 per cent to N363 per dollar, the highest level on a closing basis.
One-week historical volatility increased to 27 per cent, compared to an average of 8.6 per cent over the past year, data compiled by Bloomberg showed.
The naira weakened by 3.5 per cent to a record N294.5 against the dollar in the spot market, having swung between 280.22 and 294.84.
A currency trader at INTL FCStone Limited, Mr. David Willacy, said little trading took place.
On Friday, the CBN ended a rule capping the difference, or spread, between bids and offers in the foreign-exchange interbank market at 50 kobo, an analyst at Ecobank Transnational Incorporated, Mr. Kunle Ezun, said.
“That’s why you are seeing that volatility,” Ezun said.
He added, “The spread used to make prices move within a defined range, which is not good. The expectation is that central bank will allow the market to trade freely by removing the spread and letting liquidity determine the rate.”
The naira depreciated by 29 per cent against the dollar last month after the CBN ended a 16-month peg of 197-199 per dollar.
The naira peg and capital controls had forced bond and stock investors to flee Nigeria some months ago, a development that exacerbated an economic crash caused by the fall in oil prices from mid-2014.
The Nigerian economy contracted in the first quarter and is likely to shrink over the whole of 2016, according to the International Monetary Fund.
Few investors have returned to Nigeria’s markets since the devaluation and many think the exchange rate needs to weaken further.
Importers of items such as glass, textiles and rice are still banned from using the interbank market to buy hard currency and are forced on to the black market, where the naira trades at about 365 per dollar.
The CBN Governor, Mr. Godwin Emefiele; and CBN Deputy Governor, Sarah Alade, met investors in the United States and London last week to entice them to buy naira assets.
Emefiele reportedly dismissed suggestions that there was too little foreign-exchange liquidity and said the black market was too small for them to use as a gauge of the naira’s true value.
“The market looks to be overvalued as investors are still unwilling to sell dollars into Nigeria,” Willacy at INTL FCStone said.
He added, “We can imply this by the low trading volumes on the interbank market.”