Zero Equilibrium Revised 12 Month Naira Outlook:

By Chinedu Okoye 



Spot Rates Strengthens Beyond ZE Expectations:

Spot USD/NGN is currently N1,490.33, reflecting continued relative strength of the Naira against the USD and other majors. 

At the time of our last ZE Naira outlook :
The Naira was selling for N1560/$1. And at the N1500/$1 - N1600/$1 range, was as “relatively strong”.

This just inside the strong case zone in the earlier ZE Outlook where it was state that; below N1500 - N1400/$1 as a strong case scenario; N1500-N1600/$1 as the baseline level, and; above N1700+/$ as the most bearish scenario.

Given the economic developments on the global economy (a range of monetary policy decisions and forward guidance, changes in the Oil market, and CBN monetary policy) since our last Naira outlook earlier in the year, for FY 2025.


Going NGN/USD 12 Month Forward Rates:
Data from @Investingcom showed

Forward points from Investing.com translate into 1-year forwards at N1,703 (bid) and N1,783 (ask), implying a +14.3% to +19.7% USD appreciation versus the spot rate.

[That is the Naira is expected to be sold for N1,783 and bought N1,703 by the market.]

This means the lower end of the (technically computed) implied forward bids holds at N1,703, and the higher end N1,783. This represents a +14.3% and +19.7% USD appreciation over the Naira.

Thus, the market implied rates suggest NGN/USD to cross into ZE's the Danger zone or Worst Case scenario. However, even in light of new developments and the numerous uncertainties, our updated outlook/forecast isn't as bearish.


Updated ZE NGN/USD Expectations:

Our new Outlook for the Naira for the next 12 months are now as follows;

Strong Case Scenario; N1450 - 1550/$; Baseline Scenario; N1535 - N1600; and a worst case scenario of N1700 - N1950/$


Conditions and Rationale for the Above:

The strong Case scenario is predicated on a continuous increase in the growth and/or volume of FX inflows, from Oil, and Diaporan Remittances, (and FPI albeit to a lesser degree of growth).

The baseline expectations results from a pricing in of interest rates differentials, external debt servicing pressures, and foreign-driven local debt demand.

Our baseline is somewhat stronger than what forwards imply, because that markets is currently embedding too much risk premium relative to Naira fundamentals. This is understandable for a country just attaining market determined exchange rate stability and consistently data-dependent monetary policy.

The worst case scenario happens in the unfortunate event of am external Oil price shock, a fall in diaporan remittances and a loss in policy credibility. All three need to happen for this outcome to materialize.


Author's Remarks:

• Reserve increases provide succour, but the real clincher is monetary policy decision, guidance and credibility, and oil receipts.

• Data on net reserves where available, inflation and trade balance would be closely watched, as we would be.

• A prudent treasurer with heavy FX might want to lock in current market rates, as it would be prudent for Naira denominated asset holders to hedge their positions.

• We do not foresee any disorderly spiral in the near term; any downturn would likely be gradual rather than rapid. For data-dependency which has driven exchange rate stability and lowered Naira volatility has become a feature of the Naira under the Yemi Cardoso led Central Bank.



Disclaimer: This note is for informational and policy discussion purposes only. It does not constitute investment advice or a recommendation to trade.

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