The world’s best performing currency in April is taking a breather from a month-long rally as a stronger dollar sends chills down the spines of emerging markets from Nigeria to Indonesia.
The naira fell for the second straight day at the official and parallel markets on Monday, with banks selling a dollar for N1,234 compared to N1,169 on Friday while the currency traded at N1,270 per US dollar in street trading, weaker than N1,230 per dollar on Friday.
The halt in the naira’s hot rally has coincided with a strengthening US dollar.
The US dollar index, which measures the currency’s strength against six of its peers, closed Monday at 106.19, around its highest level since early November, according to Bloomberg data.
The US economy’s remarkable strength is a big reason behind the dollar’s rally over the past week.
Having entered the year predicting the greenback would decline, investors have been forced into a rethink by a red-hot US economy and sticky inflation requiring the Federal Reserve, the equivalent of the CBN, to hold off cutting interest rates.
Federal Reserve officials have said that the economy’s resilience means they can hold rates steady at a 23-year high as they wait for more evidence that inflation is headed toward their 2 percent target. The central bank cuts rates if it’s clear that the economy is contracting, since it’s also responsible for maximizing employment in addition to stabilizing prices.
But there are signs that inflation’s cooling has stalled. March was the third straight month of hotter-than-expected inflation readings. Inflation overall has recently been pushed up by climbing gas prices and stubbornly elevated housing costs.
If the Federal Reserve holds off on rate cuts, emerging markets including Nigeria risk capital reversals. Nigeria has enjoyed some capital inflows in the last two months thanks to reforms by the CBN.
“The dollar strengthening signals risk-off sentiment, as investors reassess implications of a delayed rate cut and take refuge in havens,” Segun Adams, an equity research analyst at Lagos-based investment bank, Afrinvest Securities Ltd, said.
Growing tensions in the Middle East following Iran’s attack on Israel has also sparked a flight to the US dollar.
The crisis caused the price of the benchmark Brent Crude to dip by 3.1 percent early last week to $87.6 per barrel from $90 per barrel.
Olaolu Boboye, lead economist at investment bank Cardinal Stone, said that the geo-political tension currently going on in the Middle East is a driver of the dollar rally.
“We think that foreign investors are exiting to safe havens, as crude oil prices are elevated at the current prices due to the crises in the Middle East,” Boboye said.
He said that in terms of inflows, some of these investors’ exit could hurt the magnitude of inflows coming into Nigeria and that can partly weaken sentiments.
The next big data analysts expect is the jobs data on May 3rd, which is expected to show a solid number.
According to the International Monetary Fund, a 10 percent rise in the dollar on the currency market would push down real Gross Domestic Product in emerging economies by 1.9 percent after one year with effects lasting over two years.
Lastly, analysts said that sentiments around the news around FX reserve depletion and CBN influence on the market drove poor sentiments in the FX market.
Boboye said that the depletion is not an issue, “only 1.8 million dollars was yanked off the reserve, and it’s not something unseen. During COVID, the CBN used to give an excess of $3 billion monthly, so I don’t think it’s a problem.”
There’s scant evidence suggesting that the CBN has been burning through its reserves to defend the naira.
The apex bank has only sold $581 million in the official fx market since the beginning of the year, accounting for 3.2 percent of the $17.9 billion traded in the period, according to data from FMDQ Securities Exchange.
Olaitan Ibrahim.