The naira recorded significant depreciation against the haven currency in a matter of few weeks despite the recent decline in the US dollar index, influenced by weak U.S. economic data.
On Thursday, the BDC naira’s rate decreased by 4.21% from N1,274/USD to N1,330 against the greenback, while the NAFEX rate decreased by 2.32% from N1,278.68 to N1,309.07 against the haven currency.
On Thursday, the illicit market saw the Nigerian naira drop to N1,400 versus the US dollar because of fresh demand pressure in the foreign currency (FX) market.
The naira has lost more than a third of its value barely two weeks after strengthening to below a N1000 against the U.S. dollar.
The naira has retreated this week as dollar liquidity dipped despite a moderation in geopolitical uncertainty and the significant decline in the greenback.
Market forces are to blame for the depreciation of the naira’s value, according to traders, as supply cannot keep up with demand.
Conflicting fundamentals weigh on Nigeria’s FX market
Even though Nigeria approved the distribution of $15.83 million to 1,583 Bureau De Change (BDC) Operators on Monday, the CBN’s sway over the country’s foreign exchange market decreased as the naira arbitrarily broke key support levels stationed at N1200/$ and N1300/$.
The CBN announced the distribution of $10,000 to Bureau De Change operators nationwide in a letter to BDCs. The allotment, which has a rate of N1,021 per US dollar, was to aid foreign currency accessibility for qualified end users and stabilize the foreign exchange market.
Demand for naira-denominated assets remains high as Nigeria attracted six times more cash than it planned to raise from the sale of one-year Treasury Bills on Wednesday despite a liquidity squeeze that muted local banks’ interest.
Investors wagered a total of N725 billion on the one-year bill, against the N122 billion that was given. Ultimately, Nigeria sold N334 billion at the prior interest rate of 26.1 per cent.
The Economic and Financial Crimes Commission (EFCC) supported the CBN’s measures by suspending over 300 accounts linked to illicit FX trading to safeguard the foreign exchange market.
EFCC Chairman Ola Olukoyede said on Tuesday in a conversation with media executives in Abuja that the accounts had been frozen, but recent price actions on the naira highlight there were still happening.
U.S dollar Index decline
Ahead of an important US inflation report for March, investors took a cautious approach, and on Friday the dollar index held around 105.6 index points after posting drawdowns in the past few days from its 5-month high. It is anticipated that this announcement will shed light on the Federal Reserve’s future monetary policy objectives.
Following statistics showing that the US economy grew by an annualized 1.6% in the first quarter of 2024—its slowest growth in about two years—the index fell to nearly two-week lows on Thursday.
Despite this, underlying inflation began to increase throughout the same time frame. Furthermore, the most recent statistics on unemployment claims indicated that the labour market is still tight, which complicated the picture for any prospective changes to the Federal Reserve’s interest rate this year.
