Nigeria Eases FX Trading Rules as JPMorgan Review Looms

Nigeria eased curbs on foreign-exchange trading less than a week after JPMorgan Chase & Co. said it may remove the country’s debt from some indexes because of a liquidity crunch.

The maximum net open position banks can hold at the end of each trading day was raised to 0.5 percent of shareholders’ funds from 0.1 percent, the Abuja-based Central Bank of Nigeria said on its website. The limit was 1 percent until last month, when the regulator ordered banks to clear positions daily. The latest measures failed to buoy the currency, which fell as much as 1.2 percent, heading for a record low on a closing basis.

“This will not necessarily help the naira’s exchange rate,” Gareth Brickman, an Africa analyst at ETM Analytics in Johannesburg, said in an e-mailed note on Thursday. Money leaving the country is weighing on the currency, he said.

JPMorgan Chase & Co. placed Nigeria on Index Watch Negative on Jan. 16 for its GBI-EM local-currency emerging-market indexes, against which about $220 billion is benchmarked, citing the drop in volumes on currency and bond markets that followed the central bank’s move last month. The New York-based lender said it will assess Nigeria’s local markets over the next three to five months.

Naira Weakness

The naira weakened 0.2 percent to 189.85 per dollar as of 1:45 p.m. in Lagos, extending losses over the past three months to 13 percent, the most among 24 African currencies tracked by Bloomberg. Yields on naira bonds due 2024 fell one basis point to 15.56 percent, the lowest on a closing basis in a week, according to data compiled by Bloomberg.

Loosening trading restrictions “means we’ll probably see increased liquidity and willingness among banks to act as market-makers,” Ayodele Salami, who oversees about $200 million of Nigerian equities as chief investment officer of Duet Asset Management Ltd., said by phone from London. “It will certainly help.”

Africa’s biggest oil producer is struggling to cope with crude prices that plunged by more than half in the past six months. Policy makers have responded by devaluing the currency, increasing interest rates to a record 13 percent and proposing spending cuts.

The Central Bank of Nigeria announced other steps Wednesday to defend the currency. It said foreign exchange bought at twice-weekly auctions and on the interbank market can only be used for “funding of letters of credit, bills for collection and other invisible transactions,” with bureaux de change no longer allowed access.

‘Reserves Bleeding’

“The CBN is trying to keep dollars contained within the banking system to prevent reserves bleeding,” ETM’s Brickman said. The nation’s foreign-exchange reserves have declined 20 percent over the past year.

Steps by the central bank follow an agreement between currency traders in Lagos earlier on Wednesday that dealing be curtailed should the currency fluctuate more than 2 percent against the dollar a day.

Slowing down currency trades will help moderate movements and give policy makers time to identify why demand has increased before intervening with dollars, a person familiar with the talks said, asking not to be identified because parts of the discussions were private.

Trading halts “might work temporarily,” Babatunde Odunsi, a fixed-income trader at Skye Bank Plc, said by phone from Lagos before the central bank’s latest measures were announced. “But it won’t address the problem of liquidity in the system.”

The central bank’s increase in the limit from zero to 0.1 percent on Jan. 12 failed to boost trading.

Keeping the maximum net open position at 0.1 percent may have resulted in a continued lack of trading, which “could have forced JPMorgan’s hand,” Duet Asset’s Salami said. While the latest steps “help in addressing in some of the concerns JPMorgan had,” if liquidity still doesn’t improve the central bank “may have to go back and raise it to 1 percent,” he said.

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