Bloomberg News

Naira Falls on Speculation Central Bank Can’t Meet Dollar Demand

October 13, 2011

Oct. 13 (Bloomberg) -- Nigeria’s naira fell for the first day in three against the dollar and was the world’s worst performer today on bets the central bank can’t meet demand for the greenback from importers after returning the naira to its target band at an auction.

The currency of sub-Saharan Africa’s second-largest economy retreated as much as 2.7 percent in the interbank market to 160.25 per dollar, before trading 2.4 percent weaker at 159.825 by 4:30 p.m. in Lagos, the commercial capital. The central bank met demand in full for the first time in 26 auctions yesterday, selling $591.67 million and bringing the currency back into its target band of 3 percentage points below or above 150 per dollar.

Central Bank of Nigeria Governor Lamido Sanusi increased the key lending rate by 2.75 percentage points and reiterated the naira target range at an extraordinary meeting Oct. 10. The bank raised the cash-reserve ratio to 8 percent from 4 percent. The naira had its biggest one-day rally in almost eight years after the decision.

There’s been “large demand for foreign currency from importers, which has pushed the likes of the naira weaker,” Dina Ahmad, a London-based emerging-markets strategist at BNP Paribas SA, wrote today in e-mailed comments. “The central bank has stepped up its foreign-exchange auction, but I don’t think that they are comfortable with maintaining the size at these levels -- I think that’s partly the reason why they resorted to a sharp rate hike.”

Oil-price declines and high import demand have depleted the nation’s foreign-currency reserves, making it more difficult for the regulator to support the naira.

Reserves, Oil Retreat

The West African nation’s foreign-currency reserves dropped to $30.9 billion on Oct. 7, the lowest in more than a year, according to data from the Abuja-based central bank. The country’s benchmark Bonny Light crude oil has fallen 13 percent since reaching a three-year high on April 8.

“The central bank will remain cautious about digging too deeply into its reserves to defend the naira,” Absa Capital Africa strategists Ridle Markus and Dumisani Ngwenya in Johannesburg wrote in an e-mailed report today.

The naira breached its targeted band at a Sept. 26 auction amid high demand for the U.S. currency, selling dollars for 155.02 naira apiece. The naira remained outside the band at the following three sales.

The Nigerian bank joined policy makers in Kenya and Uganda in raising rates to stem currency losses. The East African nations’ currencies both slipped to record lows in the past month and are the worst performers worldwide this year against the dollar.

BNP Paribas estimates the naira weakening to 162 per dollar by year-end, Ahmad said.

Nigeria’s central bank won’t defend the naira “at all costs,” Sanusi said Oct. 5.

--Editors: Ana Monteiro, Linda Shen

To contact the reporter on this story: Chris Kay in Abuja at ckay5@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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