The Nigerian Naira is struggling to gain strength against the US Dollar, particularly on the Peer-to-Peer (P2P) market, which is considered the most accessible foreign exchange (FX) market. Weak dollar inflows have hindered the Central Bank of Nigeria (CBN) in supporting the currency, leading to a wait-and-see approach among currency traders.
Key Points:
- P2P Market Exchange Rate:
- The exchange rate of the Naira on the P2P market is around N1,200 to $1 at the time of writing, reflecting its proximity to recent lows.
- Traders and speculators are cautious despite reports of anticipated FX support from the African Export and Import Bank (Afreximbank).
- Dollar Index and Global Market Dynamics:
- The dollar index futures rose about 0.2% in London trade, bouncing from a five-month low.
- Afreximbank’s release of $2.25 billion from the $3.3 billion FX support facility has not shown a positive impact as traders maintain their positions.
- Foreign Exchange Reserves and Economic Challenges:
- The Economist Intelligence Unit emphasizes Nigeria’s insufficient foreign exchange reserves to support a unified exchange rate policy.
- FX liquidity challenges contribute to volatility, price discovery difficulties, and instability in official markets.
- Nigeria faces approximately $7 billion worth of overdue foreign exchange forward contracts purchased by local companies.
- Naira’s Performance and Economic Factors:
- The Naira has been the worst-performing currency in Africa, experiencing significant depreciation since the central bank allowed for more flexible trading.
- High demand for the US Dollar is observed for school fees, medical bills, tourism, and importation of goods.
- US Dollar Index and Market Sentiment:
- The US Dollar Index is gaining ground, notably against major currencies like the Euro, British pound, and Japanese Yen.
- Market sentiment is affected by a devastating earthquake in central Japan, leading to increased demand for the safe-haven currency.
- Expectations Regarding US Dollar Index:
- Traders are pricing in a more than 70% chance of a 25-basis point rate cut in March 2024, reflecting expectations of the Federal Reserve cutting interest rates.
- Recent economic indicators, including non-farm employment data, are influencing market perceptions of future monetary policy.
Analysis and Outlook:
- Challenges for the Naira:
- Weak dollar inflows, FX liquidity constraints, and economic challenges are contributing to the Naira’s struggle to appreciate.
- The release of funds by Afreximbank is yet to translate into a positive impact on the Naira’s value.
- Global Market Dynamics:
- The dynamics of the global market, including the performance of the US Dollar Index, are influencing sentiment in Nigeria’s FX market.
- Monetary Policy Expectations:
- Expectations of a rate cut by the Federal Reserve are impacting the US Dollar Index, and this could have implications for emerging market currencies like the Naira.
The Naira’s challenges persist as it remains under pressure against the US Dollar. The effectiveness of Afreximbank’s FX support, coupled with global market dynamics and expectations regarding the US Dollar Index, will play crucial roles in shaping the Naira’s trajectory in the coming weeks. Economic reforms and measures to address FX liquidity issues will be essential for restoring stability in Nigeria’s foreign exchange market.