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Naira Strengthens Against Dollar on CBN Rate Hike and Declining Supply

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NAIRA

CEM REPORT, FINANCE | The Nigerian Naira clawed back some ground against the US Dollar on Monday, buoyed by a decline in dollar supply at the official foreign exchange market (FX). The naira closed trading at ₦1,617.96 to the dollar, appreciating by 0.58% compared to the previous Friday’s closing rate of ₦1,627.40.

Data from FMDQ Securities, a platform that oversees foreign exchange trading in Nigeria, indicates that the dollar supply by willing buyers and sellers dropped by a staggering 67.56% on Monday compared to Friday’s figures. This decrease in dollar availability has pushed the exchange rate in favour of the Naira.

“The CBN’s rate hike has definitely played a role in the recent appreciation of the Naira,” says Adeola Oshodi, a financial analyst based in Lagos. “Higher interest rates make Naira-denominated investments more appealing to foreign investors, which increases demand for the currency and strengthens its value.”

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Naira Narrows at Black Market Rate

While the official exchange rate saw the Naira appreciate, the parallel market, often referred to as the black market, displayed minimal movement. The Naira averaged around ₦1,610 to ₦1,620 on Monday, compared to ₦1,620 on Friday. This suggests that the gap between the official and parallel market rates is narrowing, which is a positive sign for the stability of the Naira

“The decline in dollar supply could be due to several factors,” explains Oshodi. “It’s possible that some businesses and individuals are holding onto their dollars in anticipation of further exchange rate movements. Additionally, the CBN’s recent interventions in the FX market may have also played a role in reducing dollar liquidity.”

Read Also: Nigeria Experiences Surge in Foreign Remittances in February

External Reserves on the Rise

Adding to the optimism surrounding the Naira is the recent increase in Nigeria’s external reserves. These reserves, which represent the foreign currency assets held by the CBN and used to defend the Naira’s value, have grown by 2.83% year-to-date. As of March 7, 2024, Nigeria’s external reserves stood at $34.11 billion, compared to $33.17 billion at the beginning of the year. This increase in reserves provides the CBN with more firepower to intervene in the FX market and stabilize the exchange rate.

Cautious Optimism for the Naira’s Future

While the recent appreciation of the Naira is encouraging, analysts remain cautious. The long-term stability of the currency will depend on several factors, including the effectiveness of the CBN’s monetary policy measures, global oil prices (a major source of revenue for Nigeria), and overall economic growth.

“The Naira’s recent gains are a positive development, but it’s important to maintain a wait-and-see approach,” says Oshodi. “The coming weeks will be crucial in determining whether this trend is sustainable. Continued efforts to address inflation and attract foreign investment will be essential for long-term stability.”

Overall, the Nigerian Naira appears to be on a path towards recovery. The CBN’s proactive measures and the decline in dollar supply have contributed to its recent appreciation. While challenges remain, the outlook for the Naira is cautiously optimistic in the near future.

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