Calm returns to Nigeria’s FX market As CBN doubles down on naira peg
The naira strengthened against the dollar across Nigeria’s multiple foreign exchange markets Friday after the Central Bank signaled a day before that it was prepared to keep the exchange rate stable against all odds.
To keep the naira stable, the CBN must contend with the impact of the coronavirus outbreak on crude oil demand, the price war between Saudi Arabia and Russia which has sent prices tumbling and a resurgent dollar which is riding on renewed investor interest in the world’s favoured reserve currency.
A dogged defense of the currency in spite of current realities will come at a cost to external
Reserves and could lead to higher interest rates and rising inflation in an economy still trying to recover from a record contraction in 2016.
The currency in Africa’s top oil producer appreciated by 1.6 percent against the dollar to $368 at the Investors and Exporters window from a record low N374 a day before.
The naira also gained 7 percent to N380 per dollar at the parallel market after weakening to as low as N410, traders said.
The panic-buying that hammered the naira cooled after the CBN said it had no plans to devalue the naira and threatened to rein in on what it called “speculative activities by unscrupulous players in the foreign exchange market” by charging them for economic sabotage. The apex bank declared it had enough reserves to meet legitimate foreign exchange demand.
That has sparked a divergence of views among market watchers.
Some traders and analysts say there are signs the dollar will appreciate in the coming weeks. Others say any naira appreciation amid the turmoil in the oil market will have to be driven by the CBN artificially propping the naira, which they say is unsustainable with the current level of reserves.
Down some 20 percent to $36 billion from $45.1 billion as of June 30, 2019, the CBN may only have firepower to hold the naira stable for so long.