CBN’s New Electronic Foreign Exchange Matching System (EFEMS) appears to be the key driver of the Naira’s appreciation in the FX market this week.

In case you don’t know what EFEMS is and you’re wondering why the Naira appreciated this week, here is a summary:
Two months ago, the CBN announced its plan to introduce the Electronic Foreign Exchange Market System (EFEMS).

In the circular dated October 2, 2024, CBN stated that EFEMS will enhance transparency and that CBN will publish real-time prices and buy/sell orders from the system.
For the sake of simplicity, think of EFEMS as a platform where banks and authorized dealers can trade FX.
On November 25, 2024, CBN issued a follow-up circular on EFEMS. This circular was a 3-page guideline on EFEMS.
The key highlights in that circular:

– Bloomberg BMatch system as the authorised platform for interbank trading.

– EFEMS is open to all authorised dealer banks licensed by CBN; other participants are required to seek CBN approval for platform access.
– Authorised dealers can trade a minimum of $100,000 with incremental clips of $50,000.

– EFEMS shall be used exclusively for spot FX transactions involving NGN and USD. Other currency pairs may be introduced upon CBN’s directive.
On Monday, December 2, 2024, banks started trading with the EFEMS and have been using the platform through this week.

This is probably the driver of the volatility we have seen on the FX market this week.
Word on the street is that the supply of USD currently exceeds demand on the EFEMS this week.

In other words, there were more sellers of USD than buyers. As a result, sellers have gradually been reducing their ask price since Monday.
The official NGN/USD quote on Monday, December 2, was 1,661.
Today (Dec 6) Official NGN/USD is 1,533.

This comes to 8% appreciation in Naira’s value in the past week.
Some people have also claimed that this Naira appreciation this week has pushed speculators (people holding USD) into panic mode.

And that there has been some panic USD sales in the black market which contributed to this week’s liquidity.
The summary is that there is USD supply now. At least, there was this week. As a result, we are seeing Naira appreciate in the official FX market.

The appreciation is also reflected in the black market which is almost at par with the official market.
This brings us to the golden questions:

Will this Naira appreciation continue?

Is this the correction many people have been expecting with the Naira?

Is this market-driven appreciation or is the naira merely being “defended”?

Will we see more liquidity in future?

credit:lekeolushuyi @ X