Naira 2-month high against US dollar explained

Naira strengthened against the US dollar last week to a 2-month high of N535/$1 at the black market, thereby reducing the gap between the parallel and the official rates; an uptick that was driven by a significant drop in demand for FX at the black market.

The exchange rate, which had hovered around N570 to N572 to a dollar since September, gained over 600 basis points to N535/$1 in the early hours of Thursday, last week as BDC operators hinged it to improve forex liquidity and decrease in demand.

It currently trades between N545-N550 at the black market depending on who you buy from.

A major boost in the country’s forex reserve via the $4 billion Eurobond raised in September has served as a significant buffer for the apex bank to continue intervening in the official forex market.

READ ALSO: Nigerian eNaira, Boon, or Bane?

As a result of the Eurobond inflow and $3.35 billion direct allocations, approved by the International Monetary Fund (IMF), Nigeria’s reserve recorded a boost of $5.05 billion in October, following a $2.76 billion gain recorded in the prior month. The nation’s foreign exchange reserve is now well above the $40 billion threshold.

Another major company in the country with a recent successful Eurobond issuance is Access Bank, after raising $500 million unsecured Eurobond from major global investors from the United States and Europe, amongst others.

These corporate Eurobond issuances indicate more forex liquidity in the country and reduced demand for FX from the parallel market. It is also worth noting that some Nigerians have stashed dollars during the decline four months ago when the CBN placed a ban on the sales of forex to BDC operators in the country.

In the same vein, the impact of the recent crude oil rally on Nigeria’s exchange rate cannot be overemphasised, after gaining over 60% year-to-date, trading at record highs as the Organization of Petroleum Exporting Countries, kept a tight leash on crude supply in the market, which ensured a positive movement in the prices of crude oil.

READ ALSO: Naira depreciates further against Dollar at official window

According to Dumebi Udegbunam, a Fixed Income trader at United Bank for Africa (UBA) said the sudden appreciation of the naira could be attributed to the continuous intervention by the CBN at the official market.

He added that an increase in oil price is also a major factor since about 90% of our foreign earnings are gotten from oil.

On the flip side, Kalu Aja, Director of Finance and Operations at Community Foundation of Snohomish County, Washington, stated that there was little to back up the long-term recovery of the naira since the current account of the country is still the same.