On Wednesday, June 21, 2023, the official Investor & Exporter (I&E) Window saw a hgh exchange between the naira and dollar reach a peak of N815/$1, marking the highest rate observed since the inception of the window in 2018.
However, by the end of the business day, the exchange rate closed at N763.17/$1, showing a depreciation compared to the previous day’s rate of N756.61/$1.
Closing the gap between exchange rates
Interestingly, the disparity between the black market and official exchange rates diminished once again on Wednesday, with the official rates closing at N763/$1, closely aligned with the black market rate ranging between N760-N770/$1, depending on the buyer or seller.
Earlier this week, it was reported that convergence had been achieved between the official and parallel market rates on Monday, June 19th, when they both settled at N770.38.
By maintaining exchange rate parity for three consecutive days, analysts believe that the official rate has taken a crucial initial step in the process of price discovery, which encompasses three major phases.
Phases of price discovery
The first phase is the transition phase, during which the newly implemented managed float regime requires market participants to familiarize themselves with and adapt to the new framework. It is common for increased volatility and uncertainty to arise during this phase as market forces begin to influence the exchange rate. This is the current scenario in Nigeria, explaining the prevailing volatility.
In the speculation and adjustment phase, market participants such as banks, forex traders, and institutional investors carefully analyze economic data, policy announcements, and other relevant factors to form expectations about future exchange rates. These expectations may lead them to take positions in currencies, resulting in fluctuations in the exchange rate. As the market becomes more accustomed to the managed float regime, speculative activity and adjustments may also occur.
The intervention phase involves the central bank intervening in the foreign exchange market to influence the exchange. If the rate deviates significantly from the desired level, the central bank may opt to buy or sell its own currency to stabilize or steer the exchange rate towards the desired direction. Such interventions can impact market sentiment and influence the process of price discovery.
Other market developments
In the peer-to-peer (p2p) market facilitated by Binance, the exchange rate hovered around N770/$1 towards the end of Wednesday.
