The Naira began the week on a strong note as it significantly appreciated against the US dollar on Monday at the country’s official foreign exchange market with the all-important U.S Fed meeting and much anticipated inflation data insight.
The naira recovered strongly to range below the N1000 mark at the country’s official market while the dollar index moderated significantly as currency traders hunkered down before key U.S interest rate decisions and U.S inflation data
Official data from FMDQ disclosed that the Naira firmed up to N864.29/1$ by Monday evening from N1099.05/$1 on Friday.
The naira is heavily exposed to external pressures, particularly from the United States amid weak liquidity and falling FX inflows.
According to the Economist Intelligence Unit, Nigeria lacked sufficient foreign exchange reserves to support its exchange rate unification policy.
Volatility, difficulties in pricing discovery, and stability in the official market are being caused by a lack of liquidity.
- According to its Africa Outlook study, “The central bank of Nigeria lacks the strength to sufficiently supply the market or clear a backlog of foreign exchange orders, which will keep foreign investors uneasy. In addition, an unsupportive monetary policy implies that the naira will remain under pressure.”
Mr. Olayemi Cardoso, the governor of the CBN, had earlier expressed optimism about the stability of the Naira a few weeks ago while speaking at the Chartered Institute of Bankers of Nigeria’s 50th anniversary, but markets show the naira is still significantly exposed to high market volatility
Notably, because of excess demand in the official market amid weak liquidity it has been difficult for the market to successfully gauge the naira’s price discovery price range
The official rate of 750 per dollar, which is used as a benchmark for the nation’s 2024 budget, is much stronger than the present value of the naira, despite the CBN’s desire for the two currencies to converge.
Price action shows naira’s recent gains correlate with the US Dollar Index losing some ground amid stable US Treasury yields. The Dollar index bids lower below 103.5 index points at the time of writing.
As the Federal Open Market Committee (FOMC) embarks on its two-day monetary policy meeting on Tuesday, the consensus expectation is for interest rates to remain unchanged. FX traders closely examine the statement to look for any clues about future rate changes in the upcoming year.
Before that, the U.S. Labor Department’s Consumer Price Index (CPI) report on Tuesday is expected to show inflation still cooling, but staying well above the Fed’s 2% annual target, with core CPI expected to come in at 4%.
Impressive to see the Naira breaking below N1000! How do you think this will impact the local economy in the face of U.S. inflation data and upcoming interest rate decisions?