The Nigerian currency has breached the N1,450 mark against the dollar on the black market, reflecting evolving dynamics in Nigeria’s FX market.
Market fundamentals indicate that the naira has lost its support at N1450, paving the way for a new wave of decline, continuing its downward trend from March when it was hailed as the world’s best-performing local currency. Recent price action suggests the naira is nearing N1500 against the dollar.
On the black market, the naira dropped to a month-low of 1,470 against the dollar on Friday, driven by high demand for the greenback. Market analysts have consistently maintained that without corresponding fiscal policy adjustments, the local currency would struggle to maintain its year-to-date gains.
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Nigeria’s oil output, a key source of FX earnings, has been declining, highlighting the need to diversify the economy and reduce FX liabilities.
Recent data from the CBN shows that a substantial portion of $1.12 billion out of the $1.61 billion in total outflows during this period went toward paying off external debt, rather than supporting the naira, indicating the increasing pressure that foreign debt is exerting on the country’s budget and the local currency market.
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As a result, the FX market in Nigeria will seek additional support, with the CBN expected to maintain its hawkish stance and raise the headline interest rate at its upcoming monetary policy meeting on May 21.
Despite the CBN’s efforts to clear actual FX backlogs and increase rates to attract Foreign Portfolio Investors (FPIs), profit-taking and a slowdown in inflows have overshadowed these successes.
Razia Khan, Standard Chartered’s top economist for Africa and the Middle East, noted that about $1.3 billion of naira futures are set to mature at the end of this month, potentially increasing demand for dollars as offshore investors look to capitalize on the currency’s appreciation.
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The dynamics of the naira have become more complex as the dollar index edged higher despite signs of slowing U.S. economic growth.
The dollar index, which measures the strength of the US dollar against a basket of six rival currencies, rose by 0.07% to 105.29 index points.