Re Naira Outlook: What's Next for the Nigerian Local Currency?



- By Chinedu Okoye 

 

Summary:

  • The Naira is currently selling for N1560/$1 (as at the time of this article), on the EFEM market, and N1605/$1 at BDCs.
  • The Naira at the N1500/$1 - N1600/$1 range, is seen as relatively strong, given that the various headwinds the currency faces.
  • Though volatility is down, a move downwardss remains more likely than a move upwards.

 

ZE Outlook vs Reality:

Given our projections at last year's end, the Naira has largely been at levels expected —i.e., N1500/$1 [±20%]. Naira staying within this range at just below the bottom 20% of the range is no surprise, given the slide in Oil prices, and foreign debt repayments.

However, it would seem that the Nigerian local currency would not be holding above the N1500/$1 mark anytime this year. Even as it continues to show resilience in the face of the above headwinds. The question then becomes, can the Naira, despite all the above, hold at current "safety" levels?

Exchange Rate Band: Below are the levels we reached as strong, baseline, weak, and "danger" levels.

A strong Naira --> N1400/$1 - N1500/$1 (frankly anywhere below N1500/$1 is a strenght signal.)

A weak Naira --> N1600-N1700/$1

Baseline --> N1500/$1 - N1600/$1

Danger --> N1700/$1 above.

 

Expectations:

Naira is expected to maintain baseline levels, falling in and out of weak territory, this is if Oil prices and other variables we watch (FPI, Diasporan Remittances, Trade balance), hold for the remainder of the year.

Where conditions deteriorate, the currency could fall into a danger zone, whereas a quick turnaround upwards in Oil prices and Remittances, could see the currency show strenght. But levels above N1500 or below N1650 aren't expected to hold for too long. This is cause the Central Bank still has sufficient liquidity to intervene in the markets, and lull disquiets in an intermittent supply squeeze.

 

Subdued Naira, Low Volatility and the New Normal:

Significant increases in FX inflows from portfolio, exports and Foreign Direct Investments would be obvious strengths for the Naira, supporting it above the N1500//$1, but these FX sources remain fragile, making the Naira vulnerable and keeping it under pressure (below N1500/$1)

But volatility is expected to continue being tamed, and this in itself is a good signal for the currency, and a base from which —in the right environment created by the right mix of policies on the fiscal side— strenght could emerge.

A gradual depreciation remains more likely than sudden shocks, as the Naira's strenght is still dependent on external (and variable) lifeline, and not organic FX generation.

The budgeted exchange rate of N1400/$1 remains elusive as it is highly unlikely that the Naira strenghtens significantly for the remainder of the year and holding between N1500-N1600/$1 levels would infact be a sign of strength.

 


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