The local currency marked its first bearish fall on the Nigerian forex market since the Central Bank of Nigeria began its Dutch Auction System last Tuesday.
This occurred as the greenback dipped after a soft U.S. producer inflation report raised hopes that similar consumer inflation easing would trigger deeper interest rate cuts.
The Nigerian naira posted its first loss at the official FX market yesterday, following four straight days of gains. The naira’s value decreased to N1,582/$.
On the Nigerian Autonomous Foreign Exchange Market (NAFEM), data from FMDQ showed that trading volume at the official market dipped from $246.4 million on Monday to $201.43 million on Tuesday, representing a decrease of 18.2 percent.
The naira’s value also moderated, dropping from N1,580 per dollar on Monday to N1,590/$ at the black market, which is easily accessible to most Nigerian residents. Consequently, the margin between the parallel market and the NAFEM rate narrowed to N7.91 per dollar from N10.8 per dollar on Monday.
The Nigerian apex bank has made considerable efforts to stabilize the Nigerian foreign currency market, resulting in a moderation of currency rate volatility with the Retail Dutch Auction.
The Retail Dutch Auction method, which the CBN has adopted, uses an auction process to sell FX to end users. The procedure starts with a call for bids, after which each bid is totaled and ranked from highest to lowest.
The CBN has increased its efforts this year to stabilize the naira’s exchange rate volatility, which has caused the naira to steadily appreciate against the dollar from roughly N1,912 per dollar in late February to below N1,000/$ in April, and it has now dropped back to around N1,600/$ levels.
Dollar Index Near 7-Month Low
The dollar index and dollar index futures showed early weakness in London trade, extending sharp overnight declines and approaching an eight-month low hit earlier in August. The haven currency was close to a seven-month low on soft PPI data as traders awaited the CPI data.
The producer price index inflation data for July came in lower than anticipated, causing the dollar to decline. Considering the mild selling pressure, the technical outlook for DXY has not changed significantly.
Price action shows that DXY’s Relative Strength Index (RSI) is below the 50-point threshold, indicating a persistent selling strategy. According to CME FedWatch, this reading caused traders to slightly shift their bets in favor of a 50-basis point cut in September, even though markets were still pricing in a possible 25 bps reduction.
However, the PPI number raised expectations that the consumer price index inflation report, anticipated later today, would likewise indicate that inflation decreased in July, providing the Federal Reserve with another motivation to start reducing rates.
A U.S. economic slowdown is a growing concern that markets believe will lead to further easing from the Fed, which is why rate cuts are expected. This week’s figures for retail sales and industrial production are in addition to the inflation statistics.
Given the fragility of the U.S. economy and market expectations of lower inflation, the outlook for interest rate cuts by the U.S. Fed is still too close to call. In the interim, however, U.S. Central Bank officials are being cautious.
The fact that short sellers have been a key detriment in the short-term trajectory suggests that naira bulls cannot control the medium- to long-term trend.
