Naira’s Strong Rally Disrupts FX Market Amid Dollar Sell-off and Reform Uncertainty

The Nigerian naira has seen a notable appreciation, catching traders in the foreign exchange (FX) market off-guard, particularly within the parallel segment. The naira’s rise above the N1600/$ mark, after months of stagnation, has left parallel market traders worried about potential losses. With many holding large dollar reserves in anticipation of a seasonal dollar demand surge, they have incurred significant financial setbacks, estimated between N10 and N20 billion. This rapid shift has been further fueled by the ‘Buy Nigeria’ campaign, which has led to a notable reduction in dollar savings as investors turn to naira-denominated assets.

The naira’s performance has sparked mixed reactions in the market. While some analysts view the recent rally as a temporary bounce, others see it as part of a broader correction toward the naira’s fair value after years of depreciation. Some experts project a weaker future for the naira, predicting a potential return to N1800/$ by the year’s end. However, there is general consensus that the naira is undervalued and that this could create room for sustained improvements in the medium term, especially if the Central Bank of Nigeria (CBN) maintains its high-interest rate policy for an extended period.

In parallel with the currency’s strengthening, foreign portfolio investments have surged as investors look to capitalize on the high returns offered by Nigeria’s financial instruments. As the country’s bond yields hover around 20%, international research institutions and local experts alike expect an influx of foreign capital in the coming months. However, some local bank sources have reported a significant decline in the popularity of dollar-denominated savings, with investors liquidating their holdings to take positions in more attractive naira assets, including equities in anticipation of bank recapitalization.

Despite the short-term gains, the naira’s long-term outlook faces significant challenges. Global economic dynamics, such as the ongoing influence of the BRICS economic bloc and the US’s dwindling dollar dominance, may create favorable conditions for the naira over time. However, the CBN faces crucial tests in implementing reforms within the Bureau de Change (BDC) sector, which could either reinforce the naira’s positive trajectory or disrupt its progress. The reform includes a plan to raise minimum capital requirements for BDCs, but implementation delays have raised concerns about its effectiveness in curbing excesses in the market.

Source: THE GUARDIAN