Naira Adjustment to Take FX Rate above ₦420/USD – Analysts
The Nigerian local currency exchange rate is projected to be devalued to N420 to a dollar at the Investors and Exporters window in 2021, analysts at Chapel Hill Denham hinted in a report.
In the note, the investment firm said based on the Real Effective Exchange Rate (REER), the Naira official rate is 25% above its long run equilibrium.
In its simple interpretation, analysts are effectively saying that the local currency is 25% over valued to its true exchange rate value.
The firm note that hence, the market may require a much lower or higher adjustment, depending on the level of confidence in the structure of the FX market.
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This also include the extent of balance of payments adjustments required, and the outlook for oil prices.
It cited that based on the Governor’s response, it would appear that the Central Bank of Nigeria is not ready to concede much ground in the near term.
Regardless, analysts maintain that Chapel Hill Denham base case view is that the market is likely to see some adjustments in 2021 that would take the FX rate above 420.00 in the I&E Window.
Recall that following the monetary policy committee (MPC) meeting, the Godwin Emefiele, CBN Governor addressed the question of widening FX rate parallel market premium.
Emefiele noted that the parallel market is shallow and not the appropriate gauge for measuring the fair value of the currency.
Nonetheless, the Governor tacitly acknowledged that the currency may be overvalued, but analysts think the CBN will rather make step-wise adjustments than impose a large shock.
It would be recalled that the CBN already engineered a 5.5% year to date depreciation of the naira-dollar exchange rate to N385.50 in the I&E Window, and also devalued the official rate by 19% to N379.00.
Yet, Chapel Hill Denham said in the note that Naira appears overvalued on a fundamental basis, as liquidity remains weak in the I&E Window.
The window recorded US$121 million per day in November compared to pre-crisis level of US$350 million per day, while parallel market premium has jumped to N97 from a discount of N5 in February.
Naira Adjustment to Take FX Rate above ₦420/USD – Analysts
