There is not much time left for the Nigerian local currency, and the U.S. dollar index is trading at two-month lows while investors wait for meaningful new signals about when the Federal Reserve would cut interest rates and review inflation data.
The value of the naira dropped by about 500 basis points last week, to close at N1,627.40 to the dollar, despite a notable inflow of foreign portfolio investors.
The naira was trading on the streets at N1,600 to the dollar as of Friday’s business close. The Nigerian Autonomous Foreign Exchange Market (NAFEM) saw trades taking place between N1,400 and N1,652 per dollar.
The difference between the value of the naira at the NAFEM and the value at the parallel market has grown due to the naira’s continued decline.
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The naira was trading on the unofficial market at about N1,600 to the greenback at the start of the week. According to the Economist Intelligence Unit, the Central Bank of Nigeria currently lacks the liquidity necessary to sustain the value of the naira.
This was mentioned in the recent Country Report on Nigeria released on Friday.
“The CBN lacks the liquidity to sustain the value of the naira; of its $33 billion in foreign reserves, a significant portion roughly $20 billion is allocated to different derivative transactions. Oil companies are not allowed to repatriate their export earnings overseas, as the CBN recently restricted. Until the currency stabilizes, there is a chance that larger convertibility limits will be imposed,” it stated.
The EIU predicted that before the year ends, the value of the naira would fall below 2,000/$.
The British-based intelligence firm further stated that the naira will be extremely volatile for most of this year, which could cause regulatory erraticism and have an impact on businesses, particularly those that hold foreign currency
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Following steep losses last week, the dollar index and dollar index futures steadily rose above the 102 index point mark on Monday.
Fed Chair Jerome Powell’s remarks that the bank was almost certain to see sufficient evidence of easing inflation crushed the greenback. Powell made it clear that he wasn’t waiting for inflation to hit 2% before thinking about lowering interest rates.
Data released on Friday revealed that nonfarm payrolls increased more than anticipated in February, adding to the haven currency’s pressure.
However, the reading for January was significantly revised down, and other readings revealed an increase in unemployment, suggesting a cooling of the labour market.
The U.S. Fed Chief’s remarks focused intense attention on Tuesday’s CPI data, particularly since some other Fed officials hinted that the direction of inflation will be a major factor in any interest rate reductions by the Fed.
