Naira Runs Out of Steam as FX Supply Plummets
The Nigerian naira tumbled amidst a struggle to find a market clearing rate across the forex market. Reversing the previous trend, the local currency failed to hit N1,000 per US dollar support level following a flurry of projections that boosted the exchange rate outlook for the second quarter of 2024.
The rapid FX spot rate depreciation at the official and informal markets drew exchange rates at both ends closer amidst the struggle to achieve the market clearing rate. The official market saw the naira close at ₦1,169.99 to the US dollar, a decrease of 1.38%, according to data from FMDQ Securities Exchange.
The levels of US dollars supplied were insufficient to meet FX demand by market participants at the Nigerian autonomous FX market. FCCPC Begins Fact-Finding Engagements in Markets to Crash Food Prices
In the parallel market, the naira closed at ₦1,165 to the US dollar amidst expectations that the Central Bank of Nigeria (CBN) would sell more foreign currency to Bureau de Change (BDCs) operators or informal market currency traders.
Since the middle of 2023, the value of the naira relative to the US dollar has declined, and the recent appreciation of the Nigerian currency has not stopped the inflationary trend. The consumer price index in Nigeria, which gauges inflation, increased once more in March, rising from 31.7% in February to 33.2%, the highest level in nearly 30 years.
To stem the tide, the Central Bank of Nigeria has raised its monetary policy rate twice this year by 600 basis points to 24.75%. In the global commodity market this week, oil prices nosedived amidst escalating tension in the Middle East.
Oil prices declined sharply as a result of Israel and Iran’s latest power tussle. Brent crude fell to $87.47 per barrel, losing about 4.5% week on week. Additionally, West Texas Intermediate (WTI) oil, the benchmark for the United States, dropped to $83.16 per barrel.
Goldman Sachs is still optimistic about the naira’s future and has projected an exchange rate of N1000 to the US dollar. It had projected a 12-month increase in the local currency to N1200 per US dollar. Amidst the apex bank’s “grossly undervalued claim,” Financial Derivative Company Limited’s analysts have also maintained that the local currency has a fair value of N910.10 per US dollar.
In its expectation, Fitch Solutions expressed a belief that the Nigerian naira will pare back most of the losses it incurred over Q1 2024, ending the financial year 2024 at N1,000. Analysts noted that the naira has strengthened markedly on the official market over the past month, having reached N1,150 from N1,625 per US dollar in mid-March.
The BMI report said, “The naira is still 60.0% weaker than it was a year ago, despite being the world’s strongest-performing currency in April thus far, having appreciated by 23.0% against the US dollar.”
The CBN claims that the primary driver of the rally has been stronger foreign exchange inflows subsequent to the cumulative 600 basis-point increase since February. However, analysts note that the strengthening of the naira coincides with a renewed decline in international reserves, which could be the result of the CBN intervening in the foreign exchange market to bolster the currency.
The essence of maintaining external reserves, according to several currency analysts, is to fulfill pertinent obligations. Expert opinions, however, differ regarding claims that the Apex Bank used foreign reserves to defend the naira. Even though the CBN is determined to maintain stable exchange rates, it has also denied supporting the local currency.
