Lagos - Nigeria's naira extended losses against the U.S. dollar on the interbank market on Tuesday, weakening to a 5-1/2 month low as foreign investors continued to pull out of government bonds.
The local unit traded at 162.56 naira to the dollar on Tuesday, after it touched an intra-day low of 162.75 naira. It closed 161.25 naira against the dollar the previous day.
The naira has been falling in recent weeks, despite interventions by the central bank meant to stabalise it, as dollar demand mounts from fuel importers and foreign investors selling off bonds and repatriating their returns.
"Yesterday, international banks were selling bond positions for their clients and buying dollars," one dealer told Reuters, adding that the trend had continued on Tuesday.
The central bank has directly sold dollars on the interbank market since last week, outside its bi-weekly foreign exchange auction, to calm the market, but it has so far managed to stem its decline, and it has made no interventions yet this week.
Dealers had expected central bank to intervene directly at the interbank on Monday to support the naira. Instead, the bank simply auctioned $300 million at 155.80 naira at its regular bi-weekly official window. It was not enough to lift the naira.
Two oil companies, Addax Petroleum and Agip, owned by Italian firm ENI sold $31 million to the interbank on Tuesday, as part of their month-end dollar sales, but strong dollar demand snapped it up.
Dealers say investors are going short on the naira, which is expected to continue weakening on strong dollar demand and rising domestic prices. Inflation is projected to peak at 14.5 percent by the third quarter, the central bank says.
Foreign exchange reserves hit a 21-month high of $37.64 billion by May 28, which could give the central bank some leeway to defend the naira in the coming days. The bank still maintains its target band of between 150 and 160 naira to the dollar.
Dealers said most importers had brought forward their dollar obligations in order to hedge against the weakening naira, and that dollar flows from offshore investors into the local debt had ceased, piling up pressure on the local currency.
"It's a mixture of illiquidity, pressure on the currency and the fact that central bank did not intervene," another dealer said, adding that it could cross 163 naira to the dollar by Wednesday if the bank did not intervene on Tuesday.
Analysts expect the interbank rate for the naira to remain under pressure for the rest of the year, which could force the bank to re-adjust its target band for the naira.
"We see the interbank rate at 163 naira (to the dollar) at end-year, following another adjustment to the ... target band," FBN Capital wrote in a note to its clinets on Tuesday.