The Nigerian naira showed little strength at the last trading session of the week, appreciating to below N1600 amid a volatile dollar index in global markets.
At the NAFEX market, the local currency gained 0.01%, moving from N1,589.61/$ to settle at N1,589.5/$.
The local currency’s modest gain comes despite the Central Bank of Nigeria’s (CBN) ongoing efforts to stabilize the market.
The naira remains near its four-month low, with the CBN implementing several measures to control the exchange rate and liquidity.
The dollar index’s recent fluctuations have added pressure to global currencies, including the naira. As the U.S. dollar experiences a bumpy ride, emerging market currencies are grappling with increased volatility and market uncertainty.
Hawkish CBN Attempts to Stabilize Nigerian FX Market
The local currency remains near its four-month low, defying the Central Bank of Nigeria’s (CBN) hawkish stance to stabilize the market despite an uptick in interest rates for the 12th consecutive meeting earlier this week. The Nigerian apex bank increased interest rates by 50 basis points to 26.75% on Tuesday and has been selling haven currency at record levels this year to boost FX liquidity.
Recently, the Nigerian Central Bank allocated $148 million to 29 authorized dealers in effort to stabilize the foreign exchange market following the naira’s recent depreciation. The transactions were made to the dealers on Monday, July 22, and Tuesday, July 23, 2024, between an exchange rate of N1,470.00/$1 and N1,510.00/$1, according to a statement released on the Apex Bank’s website on Friday.
This event occurred two weeks after the CBN sold $122.67 million to 46 authorized parties to lower volatility and increase liquidity in the nation’s stable markets. The CBN also expanded its “asymmetric corridor,” increasing lenders’ cost of borrowing to 500 basis points above the policy rate to tighten naira liquidity and lowering the return on their deposits to 100 basis points below the benchmark.
Additionally, the central bank offered investors a record yield of 22.1% on Wednesday during a Treasury Bill auction to attract naira-denominated investments. However, the persisting lack of foreign exchange remains a fundamental issue. The CBN has attributed the seasonal demand for dollars to wealthy Nigerians paying for foreign schooling and vacations abroad.
Bumpy Dollar Index Hits Global Market
The USD Index has been navigating choppy waters around the 104.00–104.50 region this week. This contrasts with divergent patterns in risk appetite, but it’s crucial to keep an eye on developments in the Japanese Yen, which has turned out to be the best-performing G10 currency this month.
The US Dollar’s turbulent journey over the last five days has been triggered by events surrounding the Japanese Yen, coinciding with a significant unwinding of short positions, expectations of a potential rate hike by the Bank of Japan at its meeting on July 31, and the effects of the most recent FX intervention by the BoJ/MoF tandem.
The sideline tone in the Greenback was further encouraged by mounting rumors that the Fed would start cutting its Fed Funds Target Range (FFTR) at its meeting in September. It appears that the Federal Reserve will not alter interest rates during its July 31 meeting.
The haven currency is also undergoing a significant transition due to Biden’s withdrawal from the race and Trump’s attempted assassination. The presidential campaigns are currently in full swing, with contenders holding differing views on how to preserve the value of their own currencies.
A weak dollar, in the opinion of Trump and his running mate, JD Vance, might support US exports and help stabilize the currency. However, the whole public now knows about this viewpoint.
The Fed is widely expected to keep its rate unchanged next week, although market players will closely monitor any changes in the Committee’s message. The Committee’s most recent projection indicated that there would only be one interest rate drop, most likely in December.
The CME Group’s FedWatch Tool indicates a 98% probability of lower rates by year-end and a 99% possibility of a rate reduction at the September 18 meeting.
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