The Nigerian naira has maintained stability in the official market, consistent with projections from Fitch Ratings, despite fluctuating around the N1500 mark against the U.S. dollar in the parallel market.
In contrast, the U.S. dollar index has surged to its highest level in eight weeks across global markets.
Recently, the naira briefly dipped below its support level of N1,500 in the unofficial market due to heightened demand for the U.S. dollar.
However, expectations are optimistic due to anticipated increased oil revenues and financial aid from multilateral donors in the third quarter, which are projected to reinforce the naira at the N1,500 threshold.
Fitch Ratings, an international credit rating agency, forecasts that the naira will conclude the year at N1,450 against the dollar.
Improving Fundamentals of the Naira
In June, the naira demonstrated relative stability against the U.S. dollar, trading within the range of N1,473 to N1,485 according to data from the Financial Market Dealers Quote (FMDQ). This stability is reflected in the lowest 100-day price swings since November and the lowest 10-day rolling volatility in a year, attributable to the Central Bank of Nigeria’s (CBN) assertive policies.
The CBN has adopted measures to bolster foreign exchange liquidity and maintain the naira’s value. This includes abandoning exchange rate caps in favor of market-driven constraints and increasing its benchmark interest rate to a historic high of 26.25%, aimed at curbing inflation, which spiked to 33.95% in May.
To further enhance transparency and attract foreign currency inflows, the CBN has implemented substantial liquidity operations through monthly bond sales and external funding, including a $925 million facility from the African Export-Import Bank (Afreximbank) and a $2.25 billion World Bank aid package approved this month to support Nigeria’s economic reforms.
U.S. Dollar Index Outlook
The U.S. Dollar Index (DXY) continues its upward trajectory, potentially extending gains for the third consecutive week. Despite recent challenges, the index has shown resilience.
Traders are advised to monitor the 105.9 index level, which acted as a resistance point in early May. The primary hurdle remains at 106.51 index points, the peak observed on April 16 this year.
On the downside, the Simple Moving Averages (SMA), particularly the 55-day SMA at 105.14, provide initial support, followed by the 100-day and 200-day SMAs at 104.61-104.48 index points. A breach below this level could lead to consolidation around 104 index points.
