•FX reserves still declining …Experts predict more pressure on the local currency
By Chinwendu Obienyi
There are heightened concerns among economic experts as Naira continues its slow drift towards parallel market rates after depreciated by 15.6 per cent to an all-time low of N1,099.05/$1 in the Nigerian Autonomous Foreign Exchange Market (NAFEM) at the weekend.
This was even as the nation’s FX reserves remained pressured during the week, declining for the fifth consecutive week by N93.70 million week-on-week (w/w) to N32.88 billion as of December 7, 2023.
Amid the Naira’s slump, the U.S. dollar index ended the week stronger owing to favourable economic data in the United States. The Bureau of Labor Statistics of the Labor Department said on Friday that 199,000 new jobs were created for nonfarm payrolls in the United States last month.
The unemployment rate dropped to 3.7 per cent in the world’s largest economy’s employment report, which may have prematurely raised expectations in the financial markets that the U.S. Federal Reserve would start lowering interest rates in the first quarter of 2024.
Following the data, traders of short-term U.S. interest-rate futures on Friday reduced their bets that the Fed will begin reducing interest rates in March 2004 and now believe that a May start to rate cuts is more plausible.
As a result, the U.S. dollar index saw a 0.3 per cent increase at 104 index points, putting it on track for a slight weekly gain following a rough month during which it lost around 3 per cent of its value.
According to analysts, a move above 104.5 index points is probably going to fuel the index rally and put further pressure on the Naira. Price action patterns, on the other hand, indicate that the US dollar is declining in momentum below or around 105.5, in keeping with its seasonal trend. Then, proponents of the naira would like to see the US dollar index return to below 103 index points. However, after losing about a third of its value, the Naira looks to be heading to the same rate as with the parallel market rate which closed the week at N1,180/$1, raising concerns about its impact on the economy.
Despite recent efforts by the Central Bank of Nigeria to bolster the foreign exchange market, the Naira’s downward trajectory continues, raising anxieties over its impact on the upcoming holiday season, traditionally characterised by increased consumer spending and reliance on imported goods. According to some the development would likely exacerbate existing inflationary pressures and further strain household budgets, particularly for those that depend heavily on imported goods.
The implications for businesses are also significant, with potential increases in production costs and challenges in maintaining profitability”.
Also reacting, Cordros Research in an emailed note said it expects FX liquidity conditions to remain tight, pending receipt of expected FX inflows. “Thus, we expect the pressure on the local currency to persist in the near term. Nonetheless, we expect foreign investors to keenly watch the development in the FX space with regards to the expected FX inflows as guided by the authorities, CBN’s recent actions in clearing its FX backlogs, and firm direction of short-term interest rates”.