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CBN sells $16.6m at First Currency Forwards Auction

By on March 26, 2011

The Central Bank of Nigeria (CBN) sold $16.6 million at its first foreign-exchange forward auction yesterday where only one commercial bank participated, the apex bank said.

The apex bank met the lender’s demand for $10 million due in a month, $616,590 due in two months and $6 million in three, all at a weighted average rate of N151.31 per dollar, the CBN said in an e-mailed statement yesterday. That compares with the CBN’s spot auction, also held last Wednesday, where 23 lenders demanded $584 million, the biggest amount sought since December 15, and the bank sold currency at a weighted average rate of 151.31 naira per dollar. Ten banks had successful bids.

“The poor response at the foreign-exchange forward auction is the result of low awareness about it,” Adedayo Idowu, a research analyst at the Lagos-based Vetiva Capital Management Ltd., told Bloomberg by phone. “Investors are very cautious, as this is the first time so they are adopting a wait-and-see attitude.”

Forwards transaction, which helps Nigerian businesses especially exporters, hedge against fluctuations in future exchnage rates, in financial parlance, means a binding agreement by two parties where one commits to sell a predetermined amout of a currency for settlement on a future date at a pre-agreed exchange rate.

The CBN had introduced the foreign-exchange forward auction to reduce demand pressure for dollars at the twice-weekly spot auction and help stabilize the value of the naira. Demand has exceeded supply at every spot auction since Feb. 2, according to data compiled by Bloomberg.

The banking watchdog will meet the rising need from investors for foreign currency before elections next month as it tries to stabilize the naira and control inflation, Governor Lamido Sanusi said on March 16. The jump in demand this month is “temporary,” based on investors’ fears that violence between religious and ethnic groups may disrupt elections, he said.

The naira has weakened 2.7 percent this year and traded unchanged from Wednesday’s close at 156.11 per dollar at 10:03 a.m. in Lagos.

Forward currency sales won’t minimize pressure at spot auctions “because unlike the forward auction, which is tied to future trade and exports,” the current high dollar demand is tied to concern before the vote, Idowu said.

Source : The Nation