Stronger Dollar to push naira above N600/$ at the black market

Due to the US Fed’s hawkish approach and the positive trend of the dollar index, a higher dollar may spell bad news for the Naira, which is likely to go below N600/$.

All eyes will be on the Federal Reserve this week, as Chairman Jerome Powell is expected to announce a rate hike and additional information on the Fed’s $9 trillion balance sheet shrinking plan.

On Monday, the dollar soared to a 20-year high against the euro, which remained stuck around $1.05. The dollar index was trading at $103 at the time of writing, up 10% in the last six months.

Because of the dollar’s global integration, its gains are placing more pressure on businesses and governments as they brace for rising interest rates on their dollar debt, especially in countries like Nigeria that rely significantly on imports.

The exchange rate on the peer-to-peer forex market was N591.2/$1 at the time of writing this article, down from N565/$1 on December 31, 2021. This indicates a YTD depreciation of N26.

Optics
Higher rates are expected to produce severe volatility in an atmosphere where people have become accustomed to ultra-easy borrowing. It may also increase the appeal of the Dollar’s yield, raising demand for the greenback even more. As a result, servicing dollar-denominated sovereign bonds could be challenging for countries with dollar debt.
Furthermore, if economic activity slows, developing economies’ currencies may take a double hit as demand for riskier assets falls.

Nigeria’s trade fundamentals haven’t improved, unfortunately: Nigeria’s capital inflows hit a four-year low of $9.66 billion in 2020, before falling to $6.7 billion in 2021.

International trade remained a critical problem as Nigeria dealt with its historic trade deficit. Nigeria’s international trade balance for 2021 has slid to a new low of N1.94 trillion, a new high. Nigeria’s exports climbed by 51% to N18.91 trillion in 2021, up from N12.52 trillion the year before.

The increase in export revenues, however, was not enough to offset a 64.1 percent increase in import expenses, which totaled N20.84 trillion. The FX outflows caused a $5.26 billion negative balance of payment in 2021, putting even more pressure on the local currency and necessitating the use of the external reserve.

What experts have to say

The predicted aggressive posture of the US Fed, according to Omotoso Oluwaseyi, Forex Analyst at WestbellisyFx, is expected to further weaken the Naira.

“If the federal funds rate is raised by 50 basis points, expanding the goal range from the present 25-50 to 75-100 basis points, this suggests that an increase in the dollar rate will drive the dollar/naira exchange rate to N600 – N620 per dollar, as opposed to the previous N580 – N585,” he stated.

According to Anwal Usman, a BDC operator in Lagos, the FX market’s instability is owing to a shortage of currency supply, while demand has surged dramatically in recent weeks.

“Dollar demand has surged dramatically, particularly because the election is rapidly approaching,” he said, explaining why the exchange rate has risen.