• Monday, May 20, 2024
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Naira weakens marginally against dollar despite strong oil price rally

Naira

The Nigerian market has been filled with a lot of ups and downs in the past week but none of the news have been positive at all. After the National Bureau of Statistics (NBS) announced on Tuesday that inflation had risen to from 12.82 percent in July to 13.2 percent in August, Naira suffered a selloff in the parallel market that has seen the US Dollar jump 2.2 percent against Naira week on week.

Naira, which enjoyed a strong rally at the start of September after the Central Bank of Nigeria (CBN) resumed the sale of dollars to Bureau de Change (BDC) operators in the country, suffered a gain reversal during the past trading week.

After sliding from 450 N/$ at the start of June to 470 N/$ by end of August, it appeared Naira was on track to make a relief rally back to 400 N/$ where it was on March 27 before CBN halted the sale of dollars to BDCS. However, after Naira hit 435 N/$ on September 3, it appears all momentum has been lost and investors betting on a continued Naira rally have suffered significant losses. On Friday last week, Naira traded at 465 N/$ in the parallel market and 380 N/$ in the official market.

Read also: Naira strengthens ahead of central bank&s dollar allocation to BDCs Monday

The fall in Naira has surprised currency traders as Nigeria’s bonny light crude oil rallied by 9 percent during the trading week. Bonny light crude oil rose from $38.98 at the start of the week to $42.48 at market close on Friday, providing the Central Bank with more ammunition to increase dollar sales into the currency market. Against expectations, Naira suffered a dip this past week as inflation jumped, spooking investors to rush back into the greenback.

Inflation has now risen for the 12th consecutive month, making it an entire year of inflation rising in the country. “Rising inflation in a country typically causes the value of the country’s currency to drop, an entire year of rising inflation could have severe effects on a country’s exchange rate. Valuing Nigeria’s exchange rate today using the purchasing power parity (PPP) will show you that Naira is a lot weaker today against the dollar than it was one year ago. This explains why CBN has been forced to devalue twice already this year,” said Faith Ogedengbe, chief economist at EUA Intelligence.

“Naira stability will probably return when crude oil trades around $45 or above for the next 3 months. If the crude oil market gets oversupplied again, CBN will have a lot of headaches trying to stabilize Naira in a market where crude oil price is tanking. A strong oil price always supports Naira, but I guess this past week was just something different,” Ogedengbe added.