Naira Pressured Despite Record-High FX Turnover, Reserves
The pressure on the foreign exchange (FX) market continued on Monday as the naira traded at N1, 740 per dollar in the parallel market despite a record-high $1.4 billion turnover and rising external reserves.
The N1,740/$ quoted on Monday represented an N8 loss from N1,732/$ seen the previous day.
The local currency also maintained losses at the official market, closing at N1, 681.42 per dollar, representing a marginal loss of 0.2 percent or N2.55, compared to N1,678.87/$ quoted on Friday.
Nigeria’s external reserves rose to $40.08 billion as of November 7, 2024, according to data from the Central Bank of Nigeria (CBN).
This represented a 21.4 percent year-to-date increase from $33.02 billion recorded at the beginning of the year.
Data from the FMDQ Securities Exchange Limited showed that the FX market turnover recorded an all-time high of $1.4 billion in transactions on Friday compared to $244.96 million on Thursday.
The naira fell to N1678.87 per dollar on Friday, losing 2.3 percent or N39.37 from N1639.50 quoted on Thursday at the Nigerian Autonomous Foreign Exchange Market (NAFEM), data from the FMDQ Securities Exchange Limited showed.
“We expect the Naira to trade within a similar band, though recent rate cuts in major economies have strengthened the case for carry-trade opportunities in emerging markets and developing economies (EMDEs), especially those with relatively stable exchange rates,” analysts at Afrinvest Securities Limited said.
A recent report by FBNQuest indicated that Nigeria’s external reserves had been boosted by increased foreign capital inflows, which were largely driven by favourable carry trade opportunities arising from the CBN’s stringent monetary policy.
“The CBN’s approach has created a unique appeal for foreign investors, who are finding Nigeria an attractive environment for capital due to its high interest rates,” an analyst at FBNQuest commented.
As of the end of October 2024, Nigeria’s reserves provided a solid buffer, covering 11.6 months of merchandise imports, based on the balance of payments data for the 12 months ending in June 2024. When services imports are included, the reserves still provided 8.1 months of cover. This marked a notable improvement compared to the previous coverage of 8.9 months for merchandise alone, and 6.8 months including services, recorded in September 2023.
The report highlighted that the gradual re-entry of foreign portfolio investors (FPIs) into the Nigerian market had significantly contributed to strengthening the nation’s import coverage.
However, it also emphasised the role of the weakened naira in reducing imports, which has effectively bolstered the reserves.
“The depreciation of the naira against other major currencies has led to higher costs for imported goods, discouraging importers and reducing overall import volumes,” the report noted.
For instance, Nigeria’s total merchandise imports were valued at $45.5 billion for the 12-month period ending in June 2024, representing a year-on-year decrease of 20 percent compared to $57.1 billion for the comparable period ending in June 2023.
Looking forward, FBNQuest anticipates a continued increase in Nigeria’s gross official reserves, driven mainly by greater foreign portfolio investments (FPI) inflows linked to the CBN’s hawkish policy and Nigeria’s positive real interest rate differential relative to advanced economies.
“The country’s monetary policy is expected to continue attracting foreign investors, providing a cushion for the external reserves,” added the FBNQuest analyst.
According to a report by Afrinvest, Brent crude oil prices strengthened last week, rising by 3.5 percent week-on-week to $75.63 per barrel due to a series of market-moving events.
First, OPEC+ announced a delay in its planned production increase originally set for December. Additionally, Hurricane Rafael led to the shutdown of over 22 percent of crude oil production facilities in the Gulf of Mexico. Hostilities resuming in the Middle East further fuelled concerns over potential oil supply disruptions.
On the domestic front, the report said the CBN foreign reserves climbed to their highest point in 32 months, advancing by 68 basis points week-on-week to $40.0 billion, the highest since February 2, 2022. Despite this, activity levels declined, with the daily average turnover in the NAFEM segment dropping by 14.2 percent to $976.5 million as of November 7, 2024. The naira showed mixed performance over the week, weakening by 70 basis points against the U.S. dollar at the NAFEM window to close at N1,678.87 per dollar. Conversely, at the parallel market, the naira strengthened by 30 basis points against the dollar, trading at N1,720.00 per dollar.
