Rising reserves, stronger remittances and increased forex liquidity boost the local currency as analysts see room for further stability….
The Nigerian naira is extending its recent gains in the official foreign exchange market, climbing to a two-year high against the US dollar as stronger dollar inflows continue to improve liquidity.
The local currency settled at N1,322 to the dollar on the Nigerian Foreign Exchange Market (NFEM), marking its strongest level against the US currency in about two years.
The naira has also recorded gains against other major international currencies, including the British pound and the euro, as improving foreign exchange liquidity provides additional support for the currency.
A major boost to the forex market has come from Nigeria’s external reserves, which have now risen above $53.8 billion.
The reserves, currently at their highest level in roughly two decades, have strengthened the Central Bank of Nigeria’s capacity to participate in the foreign exchange market and provide liquidity when necessary.
Market analysts attribute the naira’s recent performance to a combination of stronger foreign exchange inflows and reforms introduced to improve the functioning of Nigeria’s currency market.
Higher earnings from crude oil exports, increased foreign portfolio investments and rising remittances from Nigerians living abroad have all contributed to the improved supply of dollars.
Diaspora remittances, in particular, have become an increasingly important source of foreign exchange, with more funds now passing through formal international money transfer operators.
The steady inflows have approached historic levels and are nearing the CBN’s target of $1 billion in monthly remittances.
Recent monthly figures have reached about $947 million, providing a more consistent source of foreign currency for the domestic market.
Analysts say the increased flow of remittances through official channels is one of the structural benefits of the CBN’s reforms, which have also altered the way foreign exchange is traded and distributed across retail and commercial segments.
Before the reforms, Nigeria’s formal foreign exchange market was characterised by limited liquidity and significant backlogs, conditions that contributed to volatility and a wide gap between official and parallel-market exchange rates.
The situation has improved considerably as greater transparency in price discovery and increased market activity have helped narrow the disparity between the two rates.
Trading activity in the official foreign exchange market has also increased, with turnover reaching multi-month highs of more than $14 billion in recent trading cycles.
Daily transactions have frequently exceeded $130 million, reflecting stronger activity and improved liquidity in the market.
With the naira now trading around the N1,300/$ level, financial analysts believe the currency could maintain a relatively stable position around that range if current foreign exchange inflows are sustained.
Some analysts also expect the naira to record its strongest annual appreciation in nearly a decade, provided the improvements in liquidity and market confidence continue.
Dollar Movement Ahead Of US Jobs Data
While the naira has strengthened domestically, movements in the US dollar remain an important factor for global currency markets.
The US Dollar Index (DXY) was trading around 99 during early European hours on Friday, with investors taking a cautious position ahead of the latest US employment figures.
The dollar had weakened during the previous trading session following comments from Federal Reserve Governor Christopher Waller, which prompted some investors to reduce their long-term exposure to the currency.
Waller indicated that the Federal Reserve could maintain interest rates at its September meeting if incoming economic data continues to point to easing inflationary pressures.
Expectations surrounding US monetary policy have consequently shifted.
According to the CME FedWatch Tool, the probability of a September Federal Reserve rate hike has fallen from 63.2 percent to 50.2 percent.
Investors are now closely watching the US Non-Farm Payrolls report for August, which is expected to show an increase of 56,000 jobs, compared with the 23,000 gain recorded in July.
The US unemployment rate is projected to remain at 4.1 percent.
A weaker-than-expected employment report could put additional pressure on the dollar and potentially push the DXY lower, while stronger employment figures could reinforce expectations of tighter monetary policy and provide support for the US currency.
US Treasury yields have also reacted to the shifting expectations around Federal Reserve policy.
Yields initially declined after Waller’s remarks before recovering later in the trading session. Despite the fluctuations, the benchmark 10-year Treasury yield ended broadly unchanged.
Waller’s comments have largely been interpreted as supporting a data-dependent approach to monetary policy, while leaving some room for further tightening if inflation fails to continue cooling.
For the naira, sustained domestic dollar inflows will remain critical. Stronger crude oil receipts, portfolio investment, formal remittances and improved activity in the official forex market could continue to support the currency, although external developments in the global dollar market will remain an important factor for its trajectory.
