CBN Adjusts Dollar Rate as Naira Appreciates, FX Demand Dips

The Central Bank of Nigeria (CBN) has announced a revised dollar exchange rate, coinciding with a period of appreciation for the naira against major international currencies like the US dollar, British pound, and euro. This positive movement is attributed to an increase in foreign exchange availability within the official market, alongside a notable decline in interbank forex trading volume, which dropped by 59%. Consequently, the disparity between the official and parallel market dollar rates has tightened significantly, now standing at 2.88%.

Market observers suggest that crude oil prices exceeding $100 per barrel could foster continued stability for the naira. However, they emphasize that any long-term strengthening of the currency is contingent on consistent inflows of foreign currency.

Official figures released by the Central Bank of Nigeria confirm that the naira has seen a boost against the US dollar, British pound, and euro. This surge is linked to enhanced foreign exchange availability and a slowdown in interbank trading. The domestic currency registered moderate advancements in the official forex market, concurrently with a weakening dollar in the informal parallel market. This dual movement has resulted in the convergence of the two exchange rates to less than a 3% difference. This improved liquidity is bolstered by contributions from various market players, including foreign portfolio investors, non-bank corporations, and exporters.

The CBN has updated the exchange rates for the dollar, pound, and euro. On Thursday, the naira appreciated by 0.07% against the US dollar within the Nigerian Foreign Exchange Market (NFEM). It concluded trading at N1,331.6139 per dollar, marking an improvement from the N1,332.5893 recorded in the preceding session.

A report by Market Forces Africa indicated that intraday trading saw the exchange rate oscillate between N1,327 and N1,333.50 for each dollar, signifying a period of relative stability within the official window. This slight upward movement of the naira implies that increased dollar supply played a role in buttressing the currency, even as businesses and other entities maintained their demand for foreign exchange.

Foreign exchange liquidity has seen an uptick, primarily due to the active participation of foreign portfolio investors. Additionally, non-bank corporations and remittances from exporters and importers have contributed to the overall dollar supply. Despite this, a sharp reduction in interbank foreign exchange turnover was observed, pointing to a considerable decrease in trading volumes among financial institutions.

CBN data shows that foreign exchange turnover plummeted by approximately 59%, decreasing from $490.855 million in the prior session to $201.562 million. The number of interbank transactions also saw a reduction, falling from 179 on Wednesday to 128. This drop in turnover suggests that fewer deals were executed, even as the naira managed to post modest gains against leading international currencies.

The naira's positive trend wasn't limited to the dollar, as it also strengthened against other significant currencies in the official foreign exchange market. It gained 0.07% against the British pound, closing at N1,764.26 per pound, and similarly appreciated by 0.07% against the euro, finishing at N1,490.48. The parallel market mirrored these movements, with the dollar weakening by 0.29% to N1,370, the pound dropping by 0.55% to N1,810, and the euro declining by 0.33% to N1,505. These collective shifts have shrunk the difference between the official and parallel market dollar rates to 2.88%, a decrease from the previous 3.11%. This reduced spread points to a minor alignment between the two markets, though distinct exchange rates persist.

Looking ahead, market analysts anticipate that the naira will maintain relative stability within the official window, with the differential between official and parallel market rates expected to stay under 3%. AIICO Capital Limited suggests that crude oil prices surpassing $100 per barrel could be instrumental in sustaining foreign exchange inflows and bolstering the national currency. Elevated oil prices have the potential to enhance Nigeria's foreign exchange reserves by increasing export revenue, though the actual benefit is tied to production volumes, sales performance, and the amount of earnings returned to the domestic economy.

Data from the market indicates that the naira has achieved a significant year-to-date gain against the dollar in the NFEM, with the dollar depreciating by 7.25% against the local currency over this period. Nevertheless, continuous appreciation hinges on steady dollar inflows, robust engagement from foreign investors, and the overall demand for foreign currency from businesses and other market players.