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Nigerian Naira Plummets Past N1,450 Against Dollar Amidst Fragile FX Market Dynamics

May 11, 2024

 

 

 

The Nigerian currency experienced a significant downturn as it breached the N1,450 mark against the US dollar on the black market, reflecting evolving market dynamics within Nigeria’s fragile foreign exchange (FX) market.

Analysts attribute this decline to the naira losing its support at N1,450, marking a new phase of free decline, continuing its downward trajectory since March when it was lauded as the world’s best-performing local currency. Recent market trends indicate the naira hovering near N1,500 against the US dollar, signaling further challenges ahead.

On Friday, the naira hit a month-low of 1,470 against the dollar on the black market, driven by heightened demand for the greenback. Market experts have long warned that without corresponding policy interventions from the fiscal side, the local currency would struggle to maintain its year-to-date gains.

The decline in Nigeria’s oil output, a primary source of FX earnings, underscores the urgent need to diversify the economy and reduce FX liabilities.

Recent data from the Central Bank of Nigeria (CBN) revealed that a significant portion of total outflows, amounting to $1.12 billion out of $1.61 billion, was allocated to paying off external debt rather than supporting the naira, highlighting the mounting strain foreign debt is placing on the country’s budget and local currency market.

To address these challenges, the FX market anticipates additional support measures, with the CBN expected to maintain a hawkish stance and potentially raise the headline interest rate at its upcoming monetary policy meeting on May 21.

Despite efforts by the CBN to clear FX backlogs and attract foreign portfolio investments (FPIs) by amplifying rates, profit-taking and a slowdown in inflows have obscured these successes.

Standard Chartered’s top economist for Africa and the Middle East, Razia Khan, cautioned that approximately $1.3 billion of naira futures are set to mature by the end of the month, potentially exacerbating demand for dollars and further impacting Nigeria’s FX market.

Meanwhile, global investors remain focused on the US dollar index, which edged higher despite signs of slowing US economic growth. The dollar index, which measures the dollar’s strength against a basket of six major currencies, saw a slight increase to 105.29 index points. This uptick was supported by the Bank of England’s suggestion of potential rate cuts, buoying dollar bulls and maintaining upside momentum.

Investor attention now shifts to forthcoming US inflation data, which could provide insights into the Federal Reserve’s monetary policy trajectory. April’s higher-than-expected inflation figures have tempered expectations of an imminent US interest rate cut, with markets now pricing in the possibility of a cut only in November.

Amidst these developments, US Treasury rates rose as investors awaited crucial April inflation data, which is expected to influence the Federal Reserve’s future policy decisions.

 

Credit: Nairametrics

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