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The Federal Reserve’s decision to hold the benchmark interest rate provided a distinct domestic and international transmission channel for the US dollar/Nigerian naira exchange rate.
The US Federal Reserve Bank maintained interest rates and signaled a pause, while indicating that rates could remain higher for longer. The CBN’s latest data showed that the naira settled at N1,349/$ during midweek trading.
High-yield US assets remain attractive, with US Treasury yields near 5%. The tight US monetary environment also means that foreign portfolio investment (FPI) flows into Nigeria’s OBOs and local bonds remain relatively constrained, putting pressure on the supply of foreign exchange in Nigeria
Consequently, sufficiently high nominal yields can reassure risk-averse institutional investors in Nigeria’s bond market, allowing them to earn an attractive risk-adjusted real return domestically without converting their holdings from naira. Nigerian crude at approximately $115 per barrel, provide a critical foreign-exchange buffer for the country.
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However, if US inflation rises again and prompts the Federal Reserve to resume its rate-hiking cycle, capital outflows from Nigerian local debt could intensify further.
Higher oil export revenues will also help the CBN increase its gross foreign reserves, thereby strengthening its capacity to manage external shocks.
The CBN has recently intervened in the foreign-exchange market by providing liquidity directly to dealer banks to clear any backlog.
The pair is likely to trade sideways in the N1,340–1,370/$1 range in the near term, supported by the CBN’s capacity to intervene and continued crude oil inflows.
Traders will be watching the next CBN MPC meeting to assess whether Nigerian interest rates will be cut again, potentially narrowing the positive real interest rate differential with the Fed.
The US Dollar Index is trading near 102.25 during the early European hours on Thursday. The dollar index strengthened after the Fed left interest rates unchanged at its October policy meeting, as expected. Market participants will be watching the US September
Personal Consumption Expenditures (PCE) inflation report, scheduled for release on Friday.
The majority maintained the benchmark federal funds rate with a 10-2 split. Governor Lisa Cook and Cleveland Fed President Beth Hammack voted to raise rates by 25 basis points (bps).
Policymakers said they wanted incoming data to guide their next decision. Traders are pricing in an 83.3% probability of a rate hike in December, according to the CME Fed Watch tool.
US Fed chief, Warsh, said third-quarter GDP likely grew by more than 3%, and business investment appeared to be expanding at a double-digit rate. Credit availability has tightened, but the US Central Bank has been reluctant to characterize overall financial conditions as tight.
Labor market conditions remain positive, so the central bank is focused primarily on its price-stability mandate.
However, inflation remains elevated. Recent data have not changed the overall picture, Warsh said, and relative price increases should not develop into a broader inflation problem.
He also reaffirmed that the Fed’s 2% personal consumption expenditures inflation target is firm. Noting that longer-term inflation expectations suggest households and businesses have confidence in the central bank. The central bank believes its September rate hikes are beginning to take effect but remains prepared to continue tightening if prices do not decline.
Warsh repeatedly declined to speculate about the bank’s decisions at upcoming policy meetings, saying instead that developments over the coming months should clarify the appropriate path for policy.
