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The Nigerian naira posted relatively tight, stable movement in the first half of the week against the US dollar, currently settled at N1,361/$
The CBN continues to play a very hands-on role in the foreign exchange market.
These interventions (selling dollars directly to BDCs and dealers) have been the most aggressive policy tool for reigning in volatility.
A sustainable gap between N1350-1360 still depends heavily on how well Nigeria’s gross foreign reserves hold up under these defense tactics.
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Most recent market action showed that the greenback must contend with Nigeria’s central bank intervention, automatic supply, localized sales by commercial banks, and a significant psychological/technical barrier at N1,350/$ mark.
The Nigerian naira has very strong support from external reserves, which moved up to roughly $50 billion. This gives almost nine months’ cover on imports. This implies that the CBN is sufficiently positioned to defend the currency window and cut out speculators’ pressure on it.
To mop up naira liquidity, the Cash Reserve Ratio (CRR) on the banking system is set at 45%.
The MPC is locked into a tightening spree to fight persistent inflation. Interest rates have been pushed highly specifically to drain any excessive naira liquidity in the banking sector.
Current price action suggests a heavily managed equilibrium. The fundamentals show that the sustainability of this equilibrium rests solely on oil revenues, and the CBN’s continued ability to keep rates high enough to ward off inflation without stifling the economy.
Increased drive among portfolio investors (both domestic and international) toward naira-denominated assets (e.g., short-term sovereign debt and money market funds), and thus buttress demand in the local currency, has helped in the medium term.
However, some corporate demand continues to put upward pressure on the parallel market, although significant progress has been made on the settlement of verified FX backlogs to airlines and foreign investors.
US Dollar Index stays supported on strong U.S jobs data
The US dollar remains supported as currency traders await important US data and central bank meetings. The US Dollar Index (DXY) is finding support near 99.8 before retesting the upside, a less dovish Federal Open Market Committee (FOMC), and the US Consumer Price Index (CPI) and Producer Price Index (PPI).
The DXY is even retesting the 100 marks amid the blow-out Nonfarm Payrolls (NFP) numbers. Wall Street predicted about an 85K job gain. The Economy instead printed about 172K, a nearly 100% difference.
The Result crushed any remaining hope for an aggressive Fed cut, and when the index sliced through both the daily 50-day and 200-day moving averages in one day, it set a monstrous support at 99.80 during consolidation dips.
Markets seem to be testing the Fed’s patience. They are betting on high May inflation prints. The asymmetric nature of this dollar-positive trade.
April headline inflation printed at 3.8. At this time, forecasts, consensus figures, and Cleveland Fed nowcasts anticipate that headline inflation will rise well over the 4.0%-4.2% range. This is largely attributable to firm energy costs.
The DXY Target: CPI prints over 4.0% and is corroborated by a hot PPI report the day after, and DXY will obliterate the psychological 100 level and go for 100.50 with long-term structural support at 102.
The good news for investors is that there was minimal follow-through selling yesterday following Friday’s sell-off in tech stocks. Additionally, some of the stocks that spearheaded the sell-off, like the Korean chipmakers, have recovered significantly overnight
However, the dominant cyclical story in FX markets, the possibility that the Fed will tighten policy- seems to be overshadowed by the volatility of tech stocks. The US labor market’s strength was the main topic of discussion last week.
US price data will be the focus this week. Today’s highlights include the April trade balance, the weekly ADP jobs data, and the NFIB for small business optimism data. The renminbi and the Asian currency complex are receiving some support after China released another strong set of trade data overnight.
The potential FX intervention throughout a sizable portion of Asia and its implications for US Treasury sales should be noted by the US Treasury market. Data on Fed custody holdings reveal an additional $71 billion.
