The Naira strengthened against the dollar on Friday, trading at N1,585/$ from N1,590/$ posted on Thursday in the parallel market.
On the Nigerian Autonomous Foreign Exchange Market (NAFEM), the Naira strengthened to N1,574 against the greenback yesterday.
FMDQ data revealed that the NAFEM’s indicative exchange rate decreased to N1,574.2 per dollar on Thursday from N1,593.62/$, signifying a N19.4 appreciation for the local currency.
The market’s dollar volume increased by 127.5 per cent to $323.11 million compared to Thursday’s trading volume of $142 million. The FX market’s price action confirms that the Naira bulls have managed to keep the US dollar off the N1,600 levels this week.
However, a breakthrough in the N1,500 crucial resistance line is required to restart a bullish momentum.
Market analysts have long held that the local currency would not be able to sustain gains in the absence of a corresponding fiscal policy move. Petrol subsidies have increased pressure on the local currency, and Nigeria’s oil output, which is a significant source of foreign exchange earnings, has been at best mediocre, underscoring the need to diversify the economy and intensify fiscal discipline
The CBN recently established an extra mechanism through the Retail Dutch Auction System (RDAS) to facilitate FX sales to end users directly, in keeping with its commitment to provide transparent access to foreign exchange for all eligible customers.
The strategy promotes a more transparent market by lessening information asymmetry and promoting price discovery. The two-way quote system used in recent months was mainly to increase interbank market liquidity.
Uncleared FX Forward Contracts
Summer vacations, high importer requests, foreign school fee payments, and, most recently, a lack of clarity in the nation’s FX forward contracts have all put tremendous pressure on the local currency.
Nigerian businesses face a “severe crisis” as a result of the central bank’s inability to pay $2.44 billion in past-due foreign exchange forward contracts, according to the Manufacturers Association of Nigeria.
The CBN announced in March that, in an attempt to calm the market and win back investor confidence, it had resolved all legitimate foreign exchange forwards backlogs, amounting to claims of $7 billion.
At the time, it stated that the settled backlogs were those Deloitte Consulting had determined to be legitimate. The CBN added that because of doubts regarding the validity of the forex contracts, it did not settle a $2 trillion shortfall in overdue obligations.
In an email statement sent on Thursday night, MAN contested the central bank’s stance, asserting that “none have been indicted for any infractions” and that “no clear allegations or infractions have been communicated” to its members.
Stronger Dollar Index Weighs on the Naira
The U.S. Index showed some strength on Friday, adding more pressure on the Nigerian currency amid increased inflow to the haven currency. The US economic outlook is still showing growth above trend, indicating that the market may have anticipated aggressive easing too soon.
The stronger-than-expected employment data on Thursday caused bets on Federal Reserve interest rate cuts this year to retreat. Though the haven currency still faces challenges, such a narrative could buy some time for the Naira if the Federal Reserve decides to lower interest rates in September, as more people anticipate.
Trade analysts evaluate contradictory clues from the US economy to forecast whether it will soften land or go into recession. y
The markets anticipate a 25-basis point interest rate reduction from the Fed in September, per the CME FedWatch tool. According to Jeffrey Schmid, president of the Kansas City Fed, “appropriate” monetary policy reduction may be required if inflation remains low.
The Fed has not yet fully achieved its 2 per cent inflation target, but Schmid noted that it is getting there and that the current policy is “not that restrictive.”
The US saw a decrease in initial claims for unemployment benefits to 233,000 for the week ending August 2, which was less than the 240,000 market prediction. Following an upwardly revised total of 250,000 the week before—the highest in a year—comes this decline.
Increased safe-haven flows coupled with heightened Middle East geopolitical tensions could restrain the dollar’s decline. Palestinian medical professionals report that at least forty people were killed on Thursday when Israeli forces intensified their airstrikes on the Gaza Strip.
This further escalation of the conflict between Israel and Hamas-led militants comes as Israel braces itself for the possibility of a wider regional conflict following the deaths of senior Hezbollah and Hamas officials.
