The Naira has experienced a further decline in the country’s unofficial foreign exchange market, falling to a new low of N1,540 per dollar despite the U.S. dollar index hitting a monthly low. Conversely, the Naira showed some strength in the NAFEX market, appreciating by 0.39% from N1,455.51 to N1,449.80 against the U.S. dollar.
Challenges in the FX Market
The Naira’s inability to maintain the critical N1,500 support level on the black market highlights ongoing negative fundamentals affecting the currency. Despite the U.S. dollar’s weakening, the Naira has continued to depreciate, reaching its lowest point in March.
May’s daily turnover in the foreign currency market has been notably lower than in previous months, indicating a decline in market liquidity. Bureau de Change (BDC) operators have been compelled to purchase dollars at higher rates from the parallel market due to insufficient allocations from the Central Bank of Nigeria (CBN), significantly influencing the rates offered to consumers.
Impact of Oil Production
Nigeria’s oil production, a major source of foreign exchange earnings, has also impacted the Naira’s value. According to recent data, there was a daily shortfall of 500,000 barrels, exacerbating the currency’s weakness. However, OPEC data revealed a month-over-month increase in Nigeria’s oil production, excluding condensate, from 1.23 million barrels per day in March 2024 to 1.28 million barrels per day in April 2024, a 4% rise.
Government and Regulatory Actions
In response to the Naira’s depreciation, the Economic and Financial Crimes Commission (EFCC) has intensified raids on BDC operators, apprehending dealers in major cities. The Federal Government has also resumed efforts to address the Naira’s decline against the U.S. dollar, including measures against cryptocurrency traders accused of speculating against the national currency. This crackdown is part of broader efforts to stabilize Nigeria’s fragile FX market.
U.S. Dollar Index Movements
The Naira’s decline comes despite the U.S. dollar index falling to a one-month low. Currency traders are awaiting a key U.S. inflation report, which could influence the Federal Reserve’s policy direction. The U.S. dollar index fell below 104.94, driven by expectations and recent positive comments from Federal Reserve Chair Jerome Powell about the U.S. economy’s growth and inflation outlook.
Naira’s Future Outlook
There is growing pressure on the CBN to raise interest rates to stabilize the FX market, especially considering recent FX liabilities payments and low oil output. However, market fundamentals suggest that the Naira may not drop to its lowest levels seen in February, as traders await the outcome of the CBN’s Monetary Policy Committee (MPC) meeting.
Earlier this year, the CBN intensified efforts to reduce Naira volatility, leading to a steady appreciation against the dollar. The Naira strengthened from about N1,912 per dollar in late February to below N1,000 per dollar in April before plummeting back to the current level of N1,540 per dollar.
