The Nigerian currency fell to a multi-week low this week, suggesting that the CBN’s intervention and attractive fixed-income yields have not halted the naira’s depreciation.
In the final trading session of the week, the Nigerian currency fell below the N1,650/$ support line.
After ending at N1,650.20/$1 on Thursday, the naira finished at N1652.25/$1, according to data from the Nigerian Autonomous Foreign Exchange Market (NAFEM).
The naira was in its worst condition at the illegal currency market, where sellers traded on Friday for 1750/$1.
While the American dollar index showed gains, the value of the naira has fallen by 70% since the middle of last year.
Even though the country’s foreign exchange reserves hit multi-month highs this month, the naira performed poorly in every category.
The CBN’s foreign reserves reached $40 billion, the highest amount in thirty-two months.
By 2028, the local currency is predicted to depreciate to N1,993/$, per a recent research by Fitch Solutions subsidiary BMI.
With a forecast growth rate of 3% in 2024, up from 2% in 2023, Nigeria’s economy is expected to recover in 2025.
However, persistent issues like weak oil output, rising inflation, tighter monetary policies, and little foreign direct investment have hurt Nigeria’s foreign exchange market.
The central bank’s slow foreign exchange disbursements to currency exchange bureaus and restricted dollar inflows are two factors contributing to the naira’s decline. Another factor is the rise in demand for US dollars in the parallel market, which is fuelled by money managers, financial institutions, and non-financial end users.
Because of the sharp drop in the value of the naira, import prices have gone up, discouraging importers and lowering total import volumes.
Nigeria’s merchandise imports totalled $45.5 billion for the 12 months ending in June 2024, 20% less than the $57.1 billion for the same period ending in June 2023.
US Dollar Index’s 5-Day Winning Streak Comes To A Halt
Even as currency speculators reduce their USD bets on another December interest-rate decrease by the US Federal Reserve (Fed), the prognosis for the naira remains pessimistic.
During Friday’s turbulent trading, the US Dollar Index, which measures the strength of the US dollar against a basket of six other currencies, failed to record advances for the sixth consecutive day.
At a press conference following the Federal Reserve’s decision to lower interest rates by 25 basis points last week, Chair Jerome Powell said that the potential economic policies of the incoming Trump administration will not affect the central bank’s “near term” decisions.
Further Insights
As they assessed fresh Retail Sales data, the Fed chief expressed reservations about a December interest rate cut, which frightened the market.
Although Powell recognised that Trump’s proposals to lower taxes and impose punitive tariffs on US imports will be taken into consideration, he pointed out that it might be some time before policymakers have enough information to evaluate how these plans will affect their interest rate calibration.
There may be a rationale for the Fed to raise interest rates sooner than anticipated because of Trump’s actions, especially the blanket import levies, which have increased the likelihood of sticky inflation.
This rise in volatility may enhance the likelihood of a confrontation between the Fed and the new Trump administration.
Powell vehemently denied that Trump could dismiss him last week, telling reporters that he would not step down if requested to do so by the future administration.
According to the WSJ, Powell would most likely sue anyone who attempted to remove him before the conclusion of his term. Trump said he would allow Powell to serve out his remaining term in June, “especially if I thought he was doing the right thing.” He hasn’t shown any signs of attempting to get rid of Powell since.
There is disagreement among Trump’s advisors over what should be done. Any changes to the Fed’s makeup in the interim might endanger existing efforts by policymakers to fight inflation without bringing about a breakdown in the labour market or the economy as a whole.
