Naira Runs Out of Steam as FX Supply Plummets
The Nigerian naira tumbled amidst struggle to find market clearing rate across forex market. Reversing the previous trend, the local currency failed to hit N1000 per US dollar set as support level following flurry of projections that boosted exchange rate outlook for second quarter of 2024.
The rapid FX spot rates depreciation at official and informal market draw exchange rates at both end closer amidst struggle to achieve market clearing rate.
The Naira depreciated by 1.38% at the official market, closing at ₦1,169.99 to the US dollar, according to information obtained from FMDQ Securities Exchange. The levels of US dollar supplied was insufficient to meet FX demand by market participants at the Nigerian autonomous FX market.
In the parallel market, the Naira closed at ₦1,165 to the US dollar amidst expectations that the Central Bank of Nigeria (CBN) would inject sell more foreign currency to Bureau de Change (BDCs) operators or the informal market currency traders.
The naira has been losing ground against the US dollar since mid-2023 and even a recent strengthening of the Nigerian currency did not change the inflationary trend. Nigerian consumer price index that measures inflation accelerated again in March to 33.2%, the highest level in almost 30 years, from 31.7% in February.
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 latest power tussle. Brent crude fell to $87.47 per barrel, losing about 4.5% week on week. Also, the American benchmark, West Texas Intermediate (WTI) crude decline to $83.16 per barrel.
Goldman Sachs remains bullish on the naira outlook, projecting N1000 per US dollar exchange rate. It had estimated that the local currency would recoiled to N1200 per US over 12-month.
Financial Derivative Company Limited see fair value of the local currency at N910.10 per greenback, a position its analysts have maintained following ‘grossly undervalued claim’ by the apex bank.
In its expectation, Fitch Solutions expressed a believe that the Nigerian naira will pare back most of the losses it incurred over Q1 2024, ending 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.
“While the naira is the world’s strongest-performing currency in April thus far — having appreciated by 23.0% against the US dollar — it is still 60.0% weaker than it was a year ago”, BMI report stated.
The CBN state the rally has been driven by stronger foreign exchange inflows following the cumulative 600 basis-point hike 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.
However, there have divergence in expert views on claims that apex bank used foreign reserves to defend the naira, a numbers of currency analysts said the essence of keeping external reserves is to meet relevant obligations. The CBN has also denied defending the local currency despite resolve to ensure exchange rates stability.
