Nigerian central bank increases forex trading limits for lenders

Nigeria's central bank increased the foreign currency trading position for commercial banks on Thursday to 0.5 percent of their capital base from 0.1 percent, in a move to shore up interbank dollar liquidity.
Liquidity conditions have deteriorated as the naira has slumped to record lows because dollar inflows from foreign investment and other sources have dried up.
The central bank is having to intervene and sell dollars into the market, but that is burning up its foreign reserves.
According to a circular seen by Reuters, the central bank said funds sold to commercial lenders would be used for funding letters of credit, other invisible trades but should not be resold to bureau de change dealers.
The central bank had reduced dealers open positions from 1 percent to zero in a bid to stabilise the currency after it was devalued by 8 percent against the dollar in November.
Last week it allowed banks a 0.1 percent net position but warned them against carry trades or speculative activity.
The naira is at risk of speculative attacks as it is being hit hard by the slump in oil prices and by pressure on emerging market currencies as the dollar strengthens on expectations the United States will soon raise interest rates.
Nigerian currency dealers agreed on Wednesday to halt trading if there is a more than 2 percent intraday slide in the naira. They said they fear the naira could head to 200 to the dollar, creating extreme volatility and adding to deteriorating liquidity conditions.
The naira opened at 188.50 to dollar on Thursday but quickly fell to 190.07 by 0841 GMT, after ending the previous session at a record closing low of 189.20 for a second straight day.
The central bank sold $178 million at 168 naira to the dollar at its twice-weekly forex auction on Wednesday, less than the $200 million it offered, dealers said.
Banks can earn trading revenues when the naira is weak through carry trades, by borrowing the naira to buy dollars which they resell at a higher level to make a profit. That makes it difficult for genuine forex users to buy dollars when liquidity is tight.