The Nigerian naira demonstrated remarkable stability in the official market, maintaining alignment with Fitch Ratings’ projections despite fluctuating within the N1500 range against the U.S. dollar in the parallel market. This stability comes at a time when the U.S. dollar index reached an eight-week high in broader markets.
Amid a surge in demand for the U.S. dollar, the naira momentarily dipped below the N1,500 support level in the black market. However, the expectation of enhanced oil receipts and multilateral donor financing for the third quarter of this year is anticipated to bolster the naira’s position at the N1,500 level.
Fitch Ratings, an international credit rating agency, has projected the naira to conclude the year at approximately N1,450 per dollar.
Naira’s Fundamentals Brighten
Throughout June, the naira exhibited relative stability against the U.S. dollar. According to data from the Financial Market Dealers Quote (FMDQ), the naira traded within the N1,473 to N1,485 range against the U.S. dollar this month. The currency’s 100-day price swings are at their lowest since November, and its 10-day rolling volatility is at its lowest point in a year, thanks to the hawkish stance of the Central Bank of Nigeria (CBN).
The CBN has aggressively managed the foreign exchange market to enhance liquidity, a critical component of its strategy. The bank has also adopted monetary tightening measures to maintain the value of the local currency. In a bid to improve transparency, the central bank abandoned exchange rate ceilings and implemented market-based limitations.
To attract dollar inflows, reduce volatility, and curb inflation—which soared to a 28-year high of 33.95% in May—the CBN raised its benchmark interest rate to a record 26.25%. The regulator combined a total rise of 750 basis points this year with significant naira liquidity mop-ups through monthly bond sales and dollar inflows from external lenders.
In a recent development, the African Export-Import Bank (Afreximbank) provided Nigeria with $925 million, the third tranche of a $3.3 billion crude oil-backed prepayment facility, aimed at boosting hard currency availability in the local foreign exchange market. Additionally, the World Bank approved $2.25 billion in aid this month to support Nigeria’s economic reforms, which should further enhance foreign exchange liquidity.
U.S. Dollar Index Outlook
The U.S. Dollar Index (DXY) is on an upward trend, poised for potential gains for the third consecutive week. Despite some challenges, data indicate that the greenback has not performed well this week. Traders are advised to be cautious of the 105.9 index points, which triggered a rejection in early May and now serves as resistance.
The most significant hurdle lies at 106.51 index points, the peak from April 16 this year. On the downside, the trio of Simple Moving Averages (SMA) acts as support, with the 105.52 level as the initial support. The 55-day SMA at 105.14 comes first, protecting the 105.00 value. The 100-day and 200-day SMAs create a double layer of support around 104.61-104.48 index points.
The naira’s stability in the official market reflects positive strides in Nigeria’s monetary policy, supported by strategic financial interventions. The CBN’s measures, coupled with international financial support, underscore a concerted effort to stabilize the currency amidst a challenging economic landscape.
