The Nigerian naira began the week on a bearish trajectory, weakened by the U.S. dollar’s robust performance on the global stage. This downturn comes as speculation mounts over potential interest rate cuts by the U.S. Federal Reserve, impacting the Nigerian currency’s exchange rate.
Naira Plummets to Record Low
The NGN/USD exchange rate is now trading at its lowest level since March, with the naira closing at ₦1,596.6 per dollar in the official market. This marks a 1.66% decline from the ₦1,570.14 rate observed last Friday, according to data from the FMDQ’s Nigerian Autonomous Foreign Exchange Market. This depreciation is exacerbated by a reduction in foreign exchange (FX) liquidity within Nigeria’s official forex market.
Dwindling Forex Turnover
Alongside the naira’s decline, the average daily FX market turnover also decreased, falling by 14.8% from $120.81 million on Friday to $102.93 million on Monday. This drop reflects the ongoing challenges in maintaining stable forex liquidity, which is critical to supporting the naira’s value.
Black Market Trends
Contrary to the official market, the naira showed slight resilience on the black market, where it was quoted at ₦1,610 per dollar on Monday, a marginal improvement from Friday’s ₦1,615 rate. However, this marginal strength does little to counterbalance the currency’s overall volatility, which has seen the naira lose over 45% of its value since it was floated in June last year.
Impact of U.S. Federal Reserve Policies
Despite signals from Jerome Powell, the U.S. Federal Reserve Chair, hinting at possible interest rate cuts during the Jackson Hole symposium on August 23, 2024, the immediate impact on the naira was minimal. The Central Bank of Nigeria (CBN) has maintained a hawkish monetary stance, raising its benchmark interest rate by 800 basis points to 26.75% over the past year in a bid to achieve price stability and attract investment in naira-denominated assets.
Underlying Economic Challenges
Despite these efforts, the naira’s value remains under pressure due to fundamental economic issues. These include underinvestment in key sectors, low oil production, and persistent insecurity. These challenges, coupled with inconsistent dollar supply from the CBN, have significantly constrained the naira’s stability, highlighting the broader economic vulnerabilities Nigeria faces.
U.S. Dollar Index Strengthens
On the global front, the U.S. Dollar Index regained some ground on Monday, hovering around 101 index points. This recovery followed a dip last week, with Powell’s dovish remarks at Jackson Hole interpreted as a potential shift towards looser monetary policy. While this initially impacted the USD negatively, it also highlighted the mismatch between market pricing and economic fundamentals, suggesting that the dollar could see further fluctuations.
Forex Turnover Decline and Market Impact
The decline in forex turnover, which has dropped to its lowest level since January 2024, has had a pronounced impact on the naira’s exchange rate. This decline underscores the critical role of consistent and adequate dollar supply in maintaining exchange rate stability. As Nigeria continues to grapple with forex supply challenges, the naira’s outlook remains uncertain, with businesses and market operators bracing for potential further depreciation in the coming months.