Across emerging markets, it’s not uncommon for Official Window liquidity supply to be far lower than the daily domestic demand in that market. Thus parallel markets are born where hard and local currency is exchanged at a premium (or more rarely, a discount) to the official rate.
Each economy has its own drivers and factors that directly influence the parallel FX market, thus widening and narrowing the spread to the official rate. At Verto, we proudly offer parallel rates in Nigerian Naira on a daily basis, but how are we centring on an exchange rate for Verto’s clients?
In this note, and in no particular order, we will run-through the factors we consider when offering FX rates at a high level.
1. Official FX Rate Movements: At the market close, the CBN publishes data on the low/high FX rates, the closing rate on the day and finally the turnover/volume traded in the window across the day. The closing rate can be a useful indicator, however its calculation is a bit of a grey area. The low rate is useful to corroborate any rumours of CBN intervention from the previous day. The turnover/volume figure is arguably the most useful, as it gives an indication of whether the previous day’s hard currency demand was satisfied, or whether there will be more demand early the next day.
2. Macro Developments: Clearly, any significant monetary or fiscal policy moves will have an effect on the Parallel Naira market. MPC meetings are always a key consideration (as are expectations in the run up to each meeting), plus macro-economic data such as inflation prints or foreign reserve levels also play a role. While the pass-through to the FX rate may be slower than G10 economies, the effects will still be there. CBN Circulars moving the goalposts for the FX market are also a key consideration and naturally, as above, any USD supply from the CBN will always be a factor. Often times, it’s a balance between both the volume (incredibly low) and rate (incredibly discounted) where the CBN pushed USD into the official market.
3. FX Volatility: It’s no secret that the Parallel Market has been incredibly volatile for many months. While we do not employ strict vol models (given historical data can become irrelevant very quickly), we always factor in recent volatility when deciding the bid/offer spreads that we publicise. Volatile periods will often push our spreads wider, so that we can facilitate client demand without being exposed to market risk if the rate moves against our position. Similarly, in lower volatile periods, we have the luxury to offer tighter spreads to our clients.
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4. Bond Auctions: Whether Eurobonds, Local T-Bills or Open Market Operations from the CBN, any liquidity tightening or loosening will have a direct impact on the Naira rate. Close attention is paid to bid-to-cover ratios and yields, so we can build a picture of local currency demand. Naturally, any expiry of bonds will always be an important factor, particularly if this stresses the CBN or Government’s own liquidity.
5. Client Needs & Demands: Verto's client base is extensive, and there are businesses with larger demands who will indicate they have an appetite to source liquidity over the coming days or weeks. Verto will actively adjust pricing so that we have the liquidity available when our clients are looking to confirm an order to source funds. Similarly, Verto’s client base will have seasonal demands, say at month-end or at the close of the fiscal year. We adjust our pricing again to ensure we have the liquidity availability to service our client base’s needs in advance, rather than reactively sourcing liquidity for them during these periods of higher demand.
6. Verto’s Liquidity & Market Risk: For Nigeria, we don’t match all trades back-to-back in the traditional broker sense. Instead, we try to accept as much flow and liquidity as possible for our client base. As such, if we have a surplus or deficit of NGN in our accounts, we will actively reprice the rate that we’re willing to trade at so that we can reduce this exposure to zero and rebalance our liquidity.
7. Verto Exchange Now & Marketplace Volumes: The majority of Verto’s clients interact directly with our Portal interface to source liquidity. Our trading team adjusts both the rates and volumes available on Exchange Now and Exchange Deal to gauge appetite from the market. As such, the desk will manage our liquidity pool by tweaking pricing and available liquidity to ensure trade completion.
In short, whether due to volatility, liquidity or otherwise, the Parallel NGN market is an ever-evolving landscape. When the market opens daily, we proudly offer NGN rates that we are able to deal at driven by market willing buyer and seller demands. Over the course of the day, pricing and spreads fluctuate depending on the prevailing FX environment, but ultimately we endeavour to satisfy all liquidity needs and demands from our client base.
Explore Verto’s Solutions today to see how we can help your business grow and overcome common market challenges in 2024.
Speak to our sales team directly at sales@vertofx.com.
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