The foreign exchange market is where international transactions are conducted using various currencies at varying exchange rates. The global forex market was worth around 753 billion USD in 2022.
Some of the numerous factors that have influenced the world's foreign exchange market from its evolution to its current state include structural shifts in production, significant changes in the economies of various countries, and the changing pattern of international trade. Before the establishment of the Central Bank of Nigeria, foreign exchange was handled by the private sector and held in foreign balances by commercial banks acting as agents for local exporters.
According to research, the fact that the Nigerian currency was pegged at par with the British pound sterling and was easily convertible delayed the development of an active foreign exchange market. However, the centralization of foreign exchange authority in the Bank, the need for the development of a local foreign exchange market became critical.
The global FX scene has been awash with news over the past week, but we’re focusing on the United Kingdom and Nigeria. Events like the ones we’ve witnessed have the potential to impact trading and other market activities, for example; financial stresses at the national level, volatility and stock market returns, elections, and other activities beyond economic data and bank policies. Let’s have a look at what went on in the United Kingdom and Nigeria's Foreign exchange market scene over the past couple of weeks.
Recent significant events in the United Kingdom FX market
Quite a bit has happened in the UK FX Market recently, and a few are of note. Let’s take a look at them.
Big investors undeterred by Crypto failure: The recent and continuous DUMP in the cryptocurrency market had a gross effect on the foreign exchange market because according to a senior executive at a leading US bank, some currencies in the foreign exchange market are attracted to what crypto has to offer. She also added that the hedge funds and assets invested will not be put off easily due to the so-called crypto winter.
Regulated UK crypto firms fear authorisation Groundhog day: As previously stated, the cryptocurrency market’s bear run has caused many issues in the UK FX market, one of which is the UK Treasury's high-level plan for the regulation of crypto assets which left firms that already have licenses fearing they will have to start from scratch unless the new regime recognizes existing authorizations. In February, the Treasury published a consultative plan to provide a comprehensive future regulatory regime aimed at making the UK an appealing hub for crypto assets and resolving issues in the FX market.
Rising rates lead to greater interest in structured products: Short-term interest rates have risen in recent weeks, posing a problem for mortgage holders and businesses affected by the rise in borrowing costs. However, the monetary storm has had a silver lining for banks that offer structured finance products. Structured notes linked to foreign exchange have seen a surge in demand. Since the global financial crisis, most banks have not actively traded these niche products.
Recent significant events in Nigeria FX market
Apart from the country's economic and political situation affecting the availability and stability of its currency, there hasn't been much news or change in the Nigeria FX Market. However, the Naira has taken a significant hit as a result of the country's current situation, and its value is low when compared to the three currencies it is most commonly traded against (USD, GBP, and EUR).
This occurred because foreign investors' interest in the Nigeria FX Market has continued to wane as a result of insecurity, uncertainty, and sustained foreign exchange liquidity. According to analysis, strong earnings have driven every investor's sentiment, leading to the purchase of fundamentally strong stocks with attractive dividends. All of these have had a significant impact on the market and the currency.
According to the central bank website, the buying price of USD as of March 9, 2023, is NGN460.02, while the selling price is NGN461.02. The buying price in Pounds is NGN 546.8258, and the selling price is NGN 548.0145. While the Euro is purchased at NGN 486.0571 and sold at NGN 487.1137. This demonstrates how weak the Naira has become in the market, which, as previously stated, is primarily due to internal factors in the country.
Remember that foreign investor participation in the first ten months of 2022 totaled 349.59 billion USD, which was less than the NGN1.730 trillion in transactions recorded by domestic investors during the same period. This demonstrates how much the Nigeria FX Market has been affected by internal factors. Furthermore, due to the general election, market analysts advised traders to exercise caution when trading in the Nigeria FX Market. Even though the election has taken place, it is still prudent to exercise caution before entering the market.
In addition, an analyst with Parthian Securities stated on the state of the Nigerian foreign exchange market that investors are expected to seek gains in the market as fixed-income yields have decreased in recent times. "As we anticipate earnings from the banking sector, which accounts for roughly 60% of market volume and also forms the bulk of fundamentals, positive earnings will encourage investors to put more money into the market," she added.
Furthermore, another analyst stated that the lack of cash and the uncertainty surrounding the elections can discourage investors and cause them to take profits early, but when positive corporate earnings are involved, it may cause them to increase their investments.
In other news
Two of the largest banks in the US have suffered greatly over the past few weeks, as a ripple effect to the crash of one of the world’s largest cryptocurrency exchange platforms.
This resulted in a bank run for both organisations, and eventually their collapse. The effect of this is massive as startups all over the world wonder about the safety of their funds — particularly African startups who incorporated their organisations in the US for the sole purpose of gaining access to services from these banks.
Over the past week, there has been a mild effect on the price of the US dollar, but not a lot. Currencies are still fairly stable, while the world waits to see what’s in store for everyone.
The foreign exchange market can be very volatile place and the rates of the currencies can be affected by numerous factors. While we keep you updated concerning the market, we’ll continue to provide you with reliable and secure services that help you stay grounded, even during trying times. There might be a lot of uncertainty in the air, but you can be rest assured that your funds will always be safe and sound with Leatherback.
