The exchange rate must pass a major test this week to avoid the N1000/$1 prediction

Nigeria’s exchange rate closed the week at about N745/$1 on the black market, thus surviving its first major test critical to avoiding the N1000/$1 mark.

Several speculations earlier in October when the exchange rate was witnessing a spiral suggest we could be headed for N1000/$1 by end of December. Between the last week in October and the first few weeks into November, the exchange rate had fallen to as low as N870/$1 as a rash of central bank announcements triggered panic buying.

However, since then, the exchange rate appears to have found an anchor price trading within the band of N730-N750/$1. If it continues to hold within this boundary, then we could be looking at the first sign of suggestion that Nigeria will survive the scare of N1000/$1.

Similar to this year, the exchange rate endured a fairly stable price for the first two weeks of the month, before closing the year at about N565/$1. Our prognosis suggests, this week will be very key to determining how the exchange rate will close this year.

Should the exchange rate hold below the N750 price ceiling by the end of the week, it will be nearly impossible to see the currency fall to the N1000/$1 range by end of the year. This of course is dependent on a number of factors which we opine are currently on shaky grounds.

Firstly, the central bank’s willingness to continue to fund liquidity strategically and largely in stealth will need to be sustained between now and the end of the year. The external reserve has already fallen to below $37 billion this week. Proving more liquidity in the market this year will likely be a net positive for rates.

Secondly, a surge in the demand for the naira could also help ahead of the end of the year. Nigerians returning home from abroad will likely inject forex liquidity into the market that could help stabilize the currency.

Companies also looking to close the end of the year with a significant cash position will likely suck out some of the pent-up demand for forex. It is also likely that most businesses would have closed for the new year and as such may not be contributing much to aggregate demand for forex.

Another trigger could be what happens in the peer-to-peer market which we track daily at Nairametrics, Any surge in demand for stablecoins could likely affect rates. Fortunately, the market has also been fairly stable with occasional depreciations offset by periods of appreciations.

Central bank monetary policies also appear to have caused an initial stir which further depreciated the naira, but it appears, they are now working. With interest rates high, most investors are now opting for government securities rather than speculating with the naira.

Other policies such as the introduction of the new naira notes and unleashing security and law enforcement agencies by monitoring the accounts of traders have also dissuaded a lot of traders and speculators.

The recent uptick in Nigeria’s crude oil output is also a major boost for Nigeria’s export earnings. Nigeria’s daily crude oil production output increased slightly to a daily average of 1.41 million barrels in November 2022.

This is according to data from the Nigerian Upstream Petroleum Regulatory Commission, which was released last week and seen by Nairametrics. A sustained output for crude oil will boost liquidity in the forex market and could hold rates at current levels.

Finally, the strength of the exchange rate could be determined by the policy statements of the central bank. As we have seen over the last year and a half, most of the rapid depreciation we have seen in the market has been triggered by policy statements by the central bank.

The last was the announcement of the new naira notes which drove rates down to N870/$1. Recent central bank MPC meetings have been devoid of any controversial remarks that could trigger markets suggesting why the exchange rate has somewhat stabilized.

However, any further controversial comments could rattle markets again and affect the exchange rate. Whilst we do not see this happening in the near term, it cannot be ruled out.

This is the last major working week before we enter the festive period and as such these factors will loom large over the course of the week. Should rates hold firm this week within the + or – 5% band, we are confident that the exchange rate will end the year between N735/N750 to the dollar band.