The Nigerian naira was also historic in keeping its parallel market robust above the N1600 per dollar barrier, reflecting increased investor confidence in the domestic currency.Â
This is undertaken as the United States dollar already is bearish offshore, hedged by Middle Eastern geopolitical risk and expectations of an imminent Federal Reserve rate hike.
By mid-week, Lagos naira street vendors were selling the naira at N1585-N1590 per dollar, down from earlier levels of around N1600 and higher. The experts attribute this to improved macroeconomic fundamentals in easing Nigeria’s headline inflation rate and the tighter monetary policy of the Central Bank of Nigeria (CBN).
The National Bureau of Statistics states that Nigeria’s inflation rate declined to 22.97 percent in May from 23.71 percent in the previous month. Although still extremely high, it is a relief that at least the worst may be over. Financial Derivatives Company economic analyst Bismarck Rewane had assumed that the naira would remain range-bound in the official market between N1600 and N1650 during June and July, particularly since the CBN is still maintaining its money supply tightening policy stance, which was tightened at the start of the year.
One factor driving the improvement of naira fundamentals is the current rally in global oil prices. As Africa’s largest crude producer, Nigeria earns most of its foreign exchange from the sale of petroleum products. With a rise in the price of oil due to concerns of war in the Middle Eastern region, Nigeria’s FX reserves are currently receiving relief.
Geopolitical tensions cloud global currency markets
Tensions between Iran and Israel ratcheted up, shaking the markets. Israel has intensified calls for Iran to drop nuclear ambitions and regime change. Both are also responsible for the fear of the US taking the country into war as well. The US has been said to escalate military deployment within the Gulf, sending more fighter jets, among other measures, and leaving investors worldwide suspenseful.
The Strait of Hormuz is the most concerning for the market players. It is one of the world’s most important shipping routes via which almost 20 percent of the world’s oil is shipped. A series of recent mishaps, including the collision and ensuing onboard fire on two tankers off the Strait, contributed to the already charged atmosphere. Even the UK Maritime Trade Operations warned about GPS jamming in the area, which evoked alarm calls.
Iran, the largest producer with a capacity of approximately 3.3 million barrels a day, is at the focal point of such volatility. The other OPEC producers are able to tap spare capacity in an attempt to buffer against major supply shocks, but the balance is precarious. Sedin’s gestures towards energy supplies are increasing the price of oil, neatly on the side of oil-dependent economies such as Nigeria.
Dollar Weakens with Fed Decision Looming
U.S. dollars everywhere outside the United States have reduced buying power and are weaker than major currencies like the euro, Japanese yen, and Swiss franc. The greenback has dropped over 8 percent since January because of perplexing economic data and doubt about President Donald Trump’s trade strategy, which investors regard as perilous to long-term economic well-being.
Despite the recent weakening, the dollar’s depth and liquidity have given it some strength as an investor safe haven amid global uncertainty. The United States Federal Reserve is now left with a decision regarding the interest rate. As new data show some indication that the US economy is starting to slow down, others are now conjecturing that the Fed will not hike interest rates at all forcefully.
Rising oil prices and lingering geopolitical uncertainty, which can fuel inflation pressures and complicate monetary policy, add to the Fed’s conundrum. Europe’s central banks, like Switzerland, Norway, and Sweden, which this week all took seriously, are also in the sights of traders.
With the naira crossing over psychological resistance levels and exogenous factors still depressing the dollar, the Nigerian currency is finally enjoying some relief. While this rally is not to be frowned at, analysts say there would be a change depending on whether the CBN can monitor for liquidity, keep prices tight, and practice policy restraint. With oil markets gearing up for synchronization and global central banks reconsidering their strategy, the next few weeks will be instrumental in determining if the naira will continue its appreciation or witness new volatility.
