The pressure on the foreign exchange (FX) market persisted on Monday, with the naira trading at N1,740 per dollar in the parallel market despite a record-high $1.4 billion turnover and growing external reserves.
The N1,740/$ quoted on Monday was N8 less than the N1,732/$ seen the day before.
Compared to the N1,678.87/$ quoted on Friday, the local currency also lost ground at the official market, closing at N1,681.42 per dollar, or a slight loss of 0.2 percent or N2.55.
The Central Bank of Nigeria (CBN) reported that as of November 7, 2024, Nigeria’s external reserves had increased to $40.08 billion.
Compared to the $33.02 billion reported at the start of the year, this marked a 21.4 percent growth so far this year.
The FX market turnover reached an all-time high of $1.4 billion in transactions on Friday, up from $244.96 million on Thursday, according to FMDQ Securities Exchange Limited data.
According to data from the FMDQ Securities Exchange Limited, the naira dropped 2.3 percent, or N39.37, from its Thursday quote of N1639.50 per dollar at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to N1678.87 per dollar on Friday.
“We expect the Naira to trade within a similar band, though recent rate cuts in major economies have strengthened the case for carry-trade opportunities in emerging markets and developing economies (EMDEs), especially those with relatively stable exchange rates,” according to analysts at Afrinvest Securities Limited.
According to a recent FBNQuest study, Nigeria’s external reserves have been strengthened by significant foreign capital inflows, which were primarily driven by attractive carry trade opportunities created by the CBN’s tight monetary policy.
“The CBN’s approach has created a unique appeal for foreign investors, who are finding Nigeria an attractive environment for capital due to its high interest rates,” said an analyst at FBNQuest.
The balance of payments data for the 12 months ending in June 2024 showed that as of the end of October 2024, Nigeria’s reserves offered a strong cushion, covering 11.6 months of merchandise imports. The reserves still offered 8.1 months of coverage when services imports are considered. Compared to the prior coverage of 8.9 months for products just and 6.8 months including services, which was reported in September 2023, this represented a significant improvement.
The research emphasized how the slow re-entry of foreign portfolio investors (FPIs) into the Nigerian market has strengthened the country’s import coverage.
But it also highlighted how the weaker naira has helped lower imports, strengthening the reserves.
“The depreciation of the naira against other major currencies has led to higher costs for imported goods, discouraging importers and reducing overall import volumes,” the report added.
For example, during the 12 months ending in June 2024, Nigeria’s total item imports were valued at $45.5 billion, a 20 percent year-over-year decline from $57.1 billion during the same period concluding in June 2023.
FBNQuest predicts that Nigeria’s gross official reserves will continue to rise, mostly due to higher foreign portfolio investment (FPI) inflows associated with the CBN’s hawkish stance and Nigeria’s positive real interest rate differential compared to advanced nations.
The FBNQuest analyst said, “The country’s monetary policy is expected to continue attracting foreign investors, providing a cushion for the external reserves.”
Afrinvest reports that some market-moving factors caused Brent crude oil prices to improve last week, increasing by 3.5 percent week-over-week to $75.63 per barrel.
First, the production rise that OPEC+ had initially scheduled for December was postponed. Furthermore, more than 22% of the Gulf of Mexico’s crude oil production facilities were shut down due to Hurricane Rafael. The return of hostilities in the Middle East heightened concerns about possible disruptions to the oil supply.
On the other hand, the CBN’s foreign reserves increased by 68 basis points week over week to $40.0 billion, the most since February 2, 2022, the report stated, marking the greatest level in 32 months. Despite this, activity levels decreased; as of November 7, 2024, the NAFEM segment’s daily average turnover fell 14.2 percent to $976.5 million.
The week saw a mixed performance from the naira, which closed at N1,678.87 per dollar after losing 70 basis points against the US dollar during the NAFEM session. On the other hand, the naira appreciated 30 basis points vs the dollar on the parallel market, reaching N1,720.00.
