A litmus test of the naira’s stability will be in play when the Federal Reserve makes it interest rate decision on Wednesday which has currency traders take a position on the haven currency.
The naira strengthened to N1,572.86 per dollar on the official market on Monday, following a N1,602.75/$1 appreciation on Friday, signalling a positive start to the foreign exchange market.
The naira has stabilized in recent days, despite the painful process that saw it fall 70% against the US dollar to a low of 1,627 earlier in March.
Analysts at Citigroup Inc. Goldman Sachs Group and Standard Chartered Plc predict that this year’s jumbo interest-rate hikes and other measures to draw in foreign capital will cause the naira to appreciate by up to 25% versus the dollar.
The CBN initiated a couple of short- to medium-term measures to support market supply. Since newly elected President Bola Tinubu ended Nigeria’s long-standing practice of fixing the exchange rate, the naira has devalued twice in June in addition to other reforms aimed at luring foreign capital and bolstering the country’s economy.
Additionally, there is now a much smaller difference between the official and unofficial market rates. Anticipating a Fed decision on Wednesday, the dollar index and dollar index futures increased by approximately 0.2 per cent in London trade on Tuesday, reaching a nearly two-week high.
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The global FX market is also awaiting the Federal Reserve’s projections regarding its rate-cutting plans, and the Bank of Japan might be about to end negative interest rates.
These measures have drawn portfolio investors, particularly foreign portfolio investors (FPIs), who are now welcome back to the Open Market Operation (OMO) market
The index of the dollar, which gauges the greenback’s strength against six major currencies increased by 15 basis points to 103.6 index points. It has increased by slightly more than 2 per cent this year
This is mainly because the world’s largest economy has performed better than anticipated, thereby causing investors to reduce their bets that the Fed will lower interest rates significantly and swiftly this year.
Even though it is generally anticipated that the central bank will maintain interest rates, traders were wary of a more aggressive than anticipated stance, particularly in light of the past two months hotter-than-expected inflation readings.
LSEG data indicates that, compared to nearly twice as much at the beginning of the year, markets are now pricing in fewer than three cuts of 25 basis points each in 2024.
According to CME Group’s (NASDAQ: CME) FedWatch Tool, futures indicate a roughly 51 per cent chance of the first-rate cut occurring by June, which is likewise significantly lower than earlier projections.
