A stronger dollar is always bad news for Nigerians for obvious reasons, but the pain isn’t just kept within, it also finds its way back abroad. Since the doors of the Nigerian Stock Exchange was opened to foreign investors in 1995, a strengthening of the dollar has always triggered a selloff of equities in Nigerian market as foreign investors feel the brunt of exchange rate losses when they revalue their equity positions after an exchange rate devaluation, forcing them to sell early on fears of any devaluation in sight.
While whispers of a possible currency devaluation continue to get stronger in the local business environment, it appears the strengthening of the dollar this year as measured by the rising dollar index is forcing an increased pace of equity selloff in the Nigerian stock market.
Trend analysis over the last 30 years has shown a negative correlation between the returns on the US Dollar index spot and the returns on the All Share Index of the Nigerian Stock Exchange. Historical data shows that as monthly year-on-year returns on the dollar rise, the returns on the All Share Index fall and vice versa.
Obinna Uzoma, a chief economist at investment research firm, EUA Intelligence explained that “as the Dollar strengthens, the pegged Naira is at a higher risk of overvaluation and monies invested in the stock market falls in dollar terms if a currency devaluation occurs. As this risk heightens, foreign portfolio investors would prefer to liquidate their positions in the Nigerian stock market as a hedge to that risk of devaluation.”
A stronger dollar also weakens the demand for oil and as Nigeria is Oil dependent nation, its stock market is also reflective of investors’ perception of the economy. Typically, oil prices trade inversely to the U.S. dollar. A stronger dollar makes oil more expensive to much of the world, so oil prices typically fall as the dollar rises.
“Another way to look at it is the correlation between the dollar and oil prices. The stronger the dollar, the weaker oil prices trade and up until recently, then Nigerian stock market has had a positive correlation with oil prices. Investors look at a top-down analysis of the stock market and if the outlook of Oil is poor, the growth prospects of the Nigerian economy would most likely be bleak.” Uzoma added.
Since the beginning of 2017, the relationship between the All Share Index and the US Dollar index spot has been quite distinct as the two variables have consistently moved in opposite directions.
Ifeanyi John
