Thursday, September 20, 2018 / 06:13 PM / FDC
The naira has been trading within a tight band of N359-N361/$ for the past 2 months in the parallel market, whilst the IEFX exchange rate traded within a band of N360-N362.
However, this stability was tested recently when the IEFX window depreciated to a new low of N364/$ before retreating to N362. This is evidence of a build-up in forex demand pressures. As at September 17, the naira was trading at N362.93/$ at the IEFX window.
This is 0.5% higher than the street rate of N361/$. This is happening simultaneously with a persistent decline in Nigeria’s gross external reserves level, which is now below the psychological resistance level of $46bn at $45.20bn (as at Sept 14).
This has reduced the CBN’s intervention in the forex market with a total intervention of $3.55bn so far in Q3 compared to $4.26bn in Q2. The apex bank also failed to intervene in the forex market in the week ending September 14, the first time in the third quarter.
Political uncertainties are also affecting investor confidence in the Nigerian economy. As the build up to the 2019 general election intensifies, investors are liquidating their portfolios, resulting in a 9.76% decline (quarter-onquarter) in foreign portfolio inflows into Nigeria in Q2.
Implications on the Economy
CBN’s intervention in the forex market has declined and this can be partly attributed to the depletion of Nigeria’s external reserves level, which is treading close to the new psychological resistance level of $45bn.
This raises some concerns about the CBN’s ability to defend the naira in the near term. There are also concerns about the imminent demand pressures from politicians owing to political campaigns.
Therefore, we expect the naira to come under pressure across all market segments in the short to medium term.
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