The foreign exchange market began on a positive note on Monday as the naira appreciated to N1,572.86 per dollar from N1,602.75/$1 on Friday on the official market.
At the parallel market, the nation’s currency closed at N1,590 per dollar on Monday, stronger than the N1,605/$1 it closed at on Friday.
Several analysts expect the naira to stabilise further this week, following the introduction of policy measures by the Central Bank of Nigeria.
The FX market ended last week on a positive note as the naira appreciated against the dollar across official and parallel markets.
The dollar supplied by FX market players declined by 20.99 percent to $848.14 million compared to $1,073.50 million recorded in the previous trading week.
The pressure on the naira exchange rate eased last week as the country’s external reserves sustained growth in one month.
In response to inquiries by BusinessDay, Jimi Ogbobine, head of Agusto Consulting, emphasised the critical importance of addressing the demand-supply dynamics within the forex market. He highlighted the challenges faced by the supply side, citing both fundamental and short-term issues that have affected the supply side of the market.
To counteract these challenges, the Central Bank of Nigeria (CBN) has initiated various short to medium-term palliative measures aimed at bolstering market supply. These measures have notably attracted portfolio investors, particularly foreign portfolio investors (FPIs), who are now welcomed back to the Open Market Operation (OMO) market.
“What the CBN is currently doing is to incentivise investors for holding the naira and that should gradually moderate the pressure on the FX market in such a way that FPIs start to flow once again to stabilise the FX market. To stabilise the FX market, it then means that it becomes more attractive to Foreign Direct Investors (FDIs). It means that the Eurobond issuance can also happen, which is also a supply measure to FX. All of these supply dynamics can finally come into fruition while the market is ready to stabilise,” he said.
The allure for investors lies in the substantial yields offered in the OMO market, with rates exceeding 25 percent for banks and FPIs. Similarly, treasury bills have seen rates hovering around 20 percent for the 364-day tenure. Despite this, there remains a significant negative real return of over 11 percent, with inflation currently at 31.70. However, investors are optimistic about the CBN’s direction, anticipating a moderation in inflation and improved interest rates.
Ogbobine said the CBN’s strategy aims to incentivise investors to hold onto the naira, gradually alleviating pressure on the FX market. “This, in turn, is expected to attract FDIs and facilitate Eurobond issuances, contributing to FX supply dynamics.”
Moreover, domestic investors, who previously speculated against the naira, are now finding better yields by investing in treasury bills.
Ogbobine expressed confidence in the potential for FX stability amidst these developments.
“The measures implemented by the CBN signal a concerted effort to stabilise the financial markets and incentivize investments in the naira, with anticipated positive implications for FX stability and investor confidence.”
Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, said it is too early to begin to celebrate anything. “While we recognise the improvement, we need to give it more time.”
“One or two weeks’ data is too short for us to come to any credible conclusion. We need to see a trend over a month or two before we can talk about stability. It is an improvement but still far from what we would like to see. So we need to watch the trend for eight weeks before we can begin to talk about the trend that we can plan with. We need to have a framework to ensure that we have this stability, beyond the market moving itself. There has to be a deliberate policy to keep the rate to a particular band,” he said.
Data from the CBN showed that the foreign currency reserves increased by 3.62 percent to $34.37 billion as of March 12, 2024 from $33.17 at the beginning of February.
On a daily trading basis, the naira closed flat on Friday at 1,602.75/$, representing 0.39 percent stronger than 1,608.98/$1 on Thursday at the Nigerian Autonomous Foreign Exchange Market, data from the FMDQ indicated.
According to a report by Afrinvest Securities Limited, the CBN’s forex reserves appreciated 0.9 percent week-on-week (w/w) to $34.4 billion (as of March 14). Meanwhile, activity level in the NAFEM window decreased 37.4 percent w/w to $1.0 billion.
“In the currency market, the Naira strengthened against the USD at both the official and parallel windows. At the official window, the naira gained 1.5 percent w/w against the USD to close at N1,602.75/$1.00, while at the parallel market, the pair closed at 81,595.00/ $1.00, indicating a 31bps gain. This week, we expect rates across FX segments of the market to follow a similar trend barring any new developments,” analysts at Afrinvest said.
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