The Naira continued its decline across the country’s unofficial FX market, depreciating to a new low of 1,540 per dollar on the parallel market despite a falling U.S. dollar index.
However, it gained some ground in the NAFEX market, appreciating by 0.39% from N1,455.51/USD to N1,449.80 against the greenback.
Negative fundamentals weigh on Naira
Recent price action shows the Naira failed to hold its ground at the critical N1500 support level on the black market despite the dwindling value of the U.S. dollar, dropping to a new low for March.
Consequently, May’s daily turnover was noticeably smaller than in previous months, indicating a decline in liquidity in the foreign currency market.
Bureau de Change operators (BDCs) are forced to obtain dollars at higher rates from the parallel market due to an insufficient allocation from the Central Bank of Nigeria (CBN), substantially impacting the prices at which they provide to consumers. Nigeria’s most recent oil production, a major source of FX earnings, also contributes to the tepid value of the Naira; the latest data reveal a daily shortfall of 500,000 barrels.
Nigeria’s oil production, excluding condensate, increased month over month (MoM) by 4% to 1.28 million barrels per day in April 2024 from 1.23 million barrels per day in March 2024, according to OPEC data.
The EFCC has increased raids on BDC operators, apprehending dealers in the nation’s largest cities. The Federal Government has resumed measures to address the recent decline of the Naira against the US dollar, which coincided with the recent searches.
The FG accused crypto traders of speculating against the national currency, citing activities of Naira manipulation in the country’s fragile FX markets and digital cryptocurrency realm as reasons for the reported increase in pressure on the local currency.
The U.S dollar index hit a monthly low
The Naira is weakening despite the U.S. dollar index falling to a one-month low as currency traders await a critical U.S. inflation report later in the day, which might determine the direction of Federal Reserve policy.
The U.S. dollar index slipped below 104.94 index points after falling to a 1-1/2-week low of 104.92 earlier. The index gauges the strength of the greenback versus six major competitors, but it is highly weighted towards the euro.
Fed Chair Jerome Powell delivered a positive assessment of the state of the US economy on Tuesday, predicting above-trend growth in the future and maintaining confidence in declining inflation, despite recent data to the contrary.
Naira’s outlook
Pressure is already building on the CBN to increase interest rates to stabilize the foreign exchange (FX) market, particularly considering recent FX liabilities payments and low oil output.
Market fundamentals indicate that it is unlikely that the Naira will drop to its lowest level in February, at least not this month, as traders wait for the CBN’s MPC meeting to conclude.
The CBN stepped up efforts this year to reduce the volatility of the Naira’s currency rate, which led to a steady appreciation of the Naira versus the dollar, starting at about N1,912 per dollar in late February and dropping to below N1000/$ in April before plunging back to N1,540/$ levels
