On Friday, the Naira appreciated vs the US dollar, closing at N1,585/$ on the parallel market, up from N1,590/$ on Thursday.
Yesterday, the Naira appreciated to N1,574 versus the US dollar on the Nigerian Autonomous Foreign Exchange Market (NAFEM).
According to FMDQ statistics, the NAFEM’s indicative exchange rate fell on Thursday from N1,593.62/$ to N1,574.2 per dollar, indicating a N19.4 appreciation for the local currency.
Comparing the market’s dollar volume to Thursday’s trading volume of $142 million, it jumped by 127.5 percent to $323.11 million. The price action on the FX market verifies that this week’s Naira bulls were successful in keeping the US dollar below N1,600.
To rekindle a bullish momentum, however, a break through the critical resistance line at N1,500 is necessary.
Market observers have long maintained that in the absence of a commensurate fiscal policy action, the local currency would not be able to maintain its year-to-date gains. The pressure on the local currency has intensified due to petrol subsidies, and Nigeria’s oil output, which is a major source of foreign exchange revenues, has been only mediocre at best. These factors highlight the need for the economy to diversify and for fiscal discipline to be strengthened.
In keeping with its mission to give all qualified customers transparent access to foreign exchange, the CBN has set up an additional mechanism through the Retail Dutch Auction System (RDAS) to facilitate FX sales to end users directly.
By encouraging price discovery and reducing information asymmetry, the technique fosters a more transparent market. The primary goal of the two-way quote system implemented recently was to boost interbank market liquidity.
Contracts for Unfrozen Foreign Exchange
The local currency has been under a lot of strain because to summer vacations, large importer requests, payments for international school fees, and, most recently, unclear forward contracts pertaining to the country’s foreign exchange reserves.
The Manufacturers Association of Nigeria claims that the central bank’s failure to pay $2.44 billion in past-due foreign exchange forward contracts has left Nigerian manufacturers in a “severe crisis.”
The CBN declared in March that it had settled all valid foreign exchange forwards backlogs, totaling claims of $7 billion, in an effort to soothe the market and restore investor confidence.
It said at the time that the backlogs that had been settled were those that Deloitte Consulting had found to be valid. The CBN further stated that it did not settle a $2 trillion shortfall in past-due obligations due to uncertainties about the legitimacy of the FX transactions.
The central bank’s position was challenged by MAN in an email statement released on Thursday night, in which it claimed that “none have been indicted for any infractions” and that “no clear allegations or infractions have been communicated” to its members.
Naira is impacted by a stronger dollar index
On Friday, the U.S. Index experienced some strength, which raised pressure on the Nigerian Naira as more people sought refuge in the safe haven currency. The US economy is still expected to grow faster than trend, which suggests that the market may have priced in an aggressive easing program too soon.
There was a retreat in betting on this year’s Federal Reserve interest rate decreases following the release of better-than-expected employment data on Thursday. Even while the Naira still has difficulties, this kind of story could give it some breathing room if the Federal Reserve chooses to cut interest rates in September, as many people are expecting.
Trade analysts assess incongruous hints from the US economy to predict if it will enter a recession or soften.
The CME FedWatch tool indicates that the markets are pricing in a 25 basis point interest rate cut from the Fed in September. The Kansas City Fed’s Jeffrey Schmid claims that if inflation stays low, “appropriate” monetary policy contraction may be necessary.
Though Schmid pointed out that the current policy is “not that restrictive,” the Fed has not yet reached its 2% inflation target in full.
Initial claims for unemployment benefits decreased in the US to 233,000 for the week ending August 2, which was below the 240,000 market estimate. This drop comes after the previous week’s upwardly revised total of 250,000, which was the most in a year.
The dollar’s slide may be limited by elevated geopolitical tensions in the Middle East combined with an increase in safe-haven flows. According to Palestinian medical officials, Israeli forces increased their bombardment on the Gaza Strip on Thursday, resulting in the deaths of at least forty persons.
With the killings of prominent Hezbollah and Hamas officials, Israel is preparing for the potential of a wider regional battle, which is why the conflict between Israel and militants led by Hamas has escalated even more.
