Why the U.S dollar might likely hurt the naira more in near term

The Naira encountered new challenges across the main FX market segments as the dollar touched a new 13-week high due to the hawkish U.S. Fed and growing geopolitical uncertainty. As of today, the Nigerian naira opened at N753 per $1 in the parallel market, often known as the black market, while it was trading at N461 in the officially traded Forex market.

In response to Federal Reserve Chair Jerome Powell’s statement that interest rates were likely to climb more than the market anticipated, the U.S. dollar rose to a three-month high versus a basket of major currencies on Wednesday.

In London trading, the dollar index and dollar index futures both increased by approximately 0.2%, reaching their best levels since early December. On Tuesday, the two instruments also increased by roughly 1.3%.

The Fed Chief indicated in testimony before Congress that the Fed is likely to raise interest rates more than market estimates, considering recent strength in the U.S. economy. As a result, markets quickly started pricing in a higher likelihood of a 50-basis point increase in March as opposed to earlier forecasts for a rise of 25 bps.

Overnight trade saw a rise in U.S. Treasury yields as well, with a preference for shorter-term yields. This in turn led to a further deepening in the yield curve, with spreads between two-year and 10-year rates near their lowest level since October.

In addition, Fitch stated that Nigeria’s fiscal profile would be weak during the next few years. 

With restrictions on income mobilization, rising debt, and high-interest rates, the agency predicted that general government interest/revenue would remain extraordinarily high.

• “Strong fiscal finance needs are implied by structurally low non-oil revenue, spending pressures, and weak economic growth. 
• “The government faces foreign debt amortizations of $2.5 billion in both 2023 and 2024, an increase on recent years, but the majority is bilateral and multilateral debt service.”

Fitch further warned that any compromises made in this area could make the consolidation of public finances more challenging and predicted that the future administration would likely face pressure to maintain gasoline subsidies.

Fitch characterized Nigeria’s official exchange rate as “overvalued” and stated that the outcome of the presidential election would have an impact on the prospects for exchange rate reform, which would improve under a new central bank governor.

Note, however, that a member of the Central Bank of Nigeria’s monetary policy committee, Idiahi Obadan, recently buttressed that eliminating Nigeria’s gasoline subsidy and enacting reforms in the petroleum sector would greatly enhance the outlook for the naira.

Obadan stated that reversing the decrease in crude output in Africa’s largest oil producer would increase foreign reserves that are currently insufficient to preserve exchange-rate stability. In December, Nigeria had $36.6 billion in foreign exchange reserves, which is 6.2 months’ worth of imports of goods and services.