The Nigerian naira has traded for the third consecutive day against the dollar at the same exchange rate of N1,650/$ in the parallel segment of the foreign exchange market.
At the official market, data from NAFEM indicated that the local currency stood at N1,544 per dollar, reflecting an increase of N5 from Wednesday's close of N1,539 per dollar.
The naira has been identified as one of the five worst-performing currencies globally, despite increasing outflows from the country's foreign exchange reserves.
Fundamentals suggest that despite recent interest rate cuts by the United States, the Nigerian naira continues to face challenges.
The country's crude oil production, a major source of foreign exchange, remains at low levels, meaning recent CBN interventions in the volatile market have not significantly reversed the naira's fall in value.
Price developments indicate that short sellers of the naira continue to dominate the unofficial black market. The naira is likely to face increased selling pressure as demand for foreign currency increases, particularly for overseas tuition fees, holidays and fuel imports.
According to its H2 2024 forecast report titled “Bridging Reforms to Recovery,” Cordros Research predicts that the naira could trade between N1,400 and N1,500 per dollar by year-end. This projection assumes that the CBN will continue to implement foreign exchange reforms and monetary tightening measures, keep interest rates high, moderate the impact of current geopolitical tensions in emerging markets, continue to intervene in the foreign exchange market, and maintain average domestic oil production as global interest rates decline in H2 2024.
The research also outlines a worst-case scenario in which unfavourable conditions could cause the naira to depreciate to between 1,500 and 1,600 naira per dollar.
Dollar index remains range-bound in global market
After Federal Reserve Chair Jerome Powell stated that a 50 basis point (bp) rate cut would not be the new normal, traders quickly recovered their initial losses on Wednesday but lost some ground yesterday. Looking ahead, the extent of any reduction will depend on economic data released ahead of each rate decision, which markets view as somewhat hawkish.
In economic data, traders are debating the likelihood of a further 50 basis point rate cut, with stronger economic data expected on Thursday. The weekly jobless claims report came in below the 230,000 expected at 219,000. The Philadelphia manufacturing index rose 1.7 points, in line with the expected decline of -1 percent.
Price action shows that the US Dollar Index (DXY) is back within its range after a brief dip below it. Over the past few weeks, DXY fluctuations have been influenced by factors outside its usual frequency band. Given the recent Fed rate cut and the outlook for the year, a gradual depreciation of the currency is expected. Additional stress is likely at the lower end of the spectrum if economic data continues to deteriorate, which will put pressure on the Fed to cut interest rates by an additional 50 basis points in November.
The upper limit of the recent range remains at 101.90. The 55-day simple moving average (SMA), currently at 102.74, could lead the index to 103.18 in the future. The 200-day SMA and the 100-day SMA, at 103.79, make the next leg quite uncertain.
The dollar index, which measures the value of the U.S. dollar relative to a basket of six other currencies, rose 0.2 percent to 100.48 index points in early trading on Friday, though it remained just above a 12-month low following the Federal Reserve's significant 50-basis-point rate cut to a range of 4.75 percent to 5 percent.
Markets are projecting a 40% chance of the Fed cutting rates by an additional 50 basis points in November, with expectations of 73 basis points by year-end. By the end of 2025, rates are anticipated to be at 2.85 percent, which is currently considered the Fed’s neutral estimate. Ahead of the US Federal Reserve (FED) meeting, the US dollar (USD) was trading at similar levels and even rising in anticipation of the US trading session.
