The naira displayed mixed signals against the dollar in Nigerian FX markets on Thursday.
The greenback rose from seven-month lows amid some bargain hunting, though dollar gains were capped by expectations of interest rate cuts.
The naira gained roughly N50, settling at N1,543/$1 on Wednesday, up from N1,592/$1 on Tuesday, according to data from the NAFEM market.
However, the domestic currency lost the N1,600/$ support line in the black market, trading at N1,610/$1 late Wednesday, compared to N1,605/$1 on Tuesday. Market indicators confirm that despite improved macroeconomic conditions in the Nigerian FX market, the local currency is struggling to maintain the crucial N1,500 support level and is under significant strain this month.
Fundamentals suggest that the local currency may move towards N1,800/$1 if it cannot sustain its current levels. At this point, even staunch proponents of free market economics will be skeptical that the naira will reach its March highs this quarter.
According to IMF projections, the naira is expected to depreciate by 35 percent by 2024, with a final value of N2,081/$. Different entities have varying views on the naira’s performance in 2024. The FDC was more optimistic, projecting that the naira’s exchange rate will stabilize at N1,580/$1, while the Economist Intelligence Unit (EIU) predicted N2,000/$. The Federal Government of Nigeria’s 2024 budget assumption set the exchange rate at N800/$1.
Nigeria’s apex bank’s recent attempt to support the faltering naira by providing record amounts of FX directly to companies has not had the desired effect. The naira has barely moved since the CBN sold about $815 million directly to companies on August 6, the largest single-day intervention under CBN Chief Olayemi Cardoso, ranging from manufacturers to airlines.
The rapid increase in the parallel market rate has sparked concerns that it might continue to affect the cost of many imported goods, except for petrol, which appears to be supported by NNPCL. Foreign exchange traders also blame the CBN’s erratic dollar sales for the ongoing pressure on the naira. According to Bureau De Change (BDC) operators, “The CBN doesn’t sell dollars regularly enough,” causing consumers to lose faith in the currency market, which puts pressure on the parallel market.
Dollar Shows Strength from 7-Month Lows
The dollar index increased by 20 basis points in London trade, recovering from three days of sharp declines and reaching seven-month lows. With more bets placed on a September interest rate cut, the greenback may face further pressure. The Fed’s late-July meeting minutes, released on Wednesday, indicated that most policymakers supported lower rates. The US dollar showed some positivity with a slight increase in US Treasury bond yields, but further appreciation of the currency looks unlikely given the Fed’s dovish forecasts.
The US Bureau of Labor Statistics’ preliminary annual benchmark review of employment data revealed that, compared to what was reported during the year through March, US employers added 818,000 fewer jobs. This suggests that the US labor market may not be as robust as previously thought, raising the possibility of more aggressive policy easing by the Fed. While some policymakers were inclined towards immediate action, the FOMC minutes from July 30-31 showed that most Fed Reserve officials supported the case for a rate cut in September.
Global investors, reacting rapidly, increased their pricing for a 50-basis point rate cut in September from 29 percent the day before to 38 percent now. Additionally, by year’s end, markets anticipate the Fed will announce an easing of about 100 basis points, which should cap US bond yields and prevent aggressive bets by USD bulls. A dramatic drop in U.S. interest rates was supported by payroll data for the year ending in March 2024. The revision also sparked fresh concerns that a slowing labor market might indicate a U.S. recession, particularly considering the recent weakness in the payroll data.
