Naira faces FX liquidity risk amid high uncertainty

Recent fundamentals in the Nigerian socio-economic space show that the naira is vulnerable.

The naira is a crude oil derivative based on Nigeria’s high reliance on fossil fuels for foreign exchange earnings. Concerns about weak demand, growing trade tensions between the U.S. and important trading partners, and OPEC+ production quota increases are negatively affecting the Nigerian currency.

Nigerian Bureau de Change operators have accused commercial banks of not selling them foreign currency.

BDCs are struggling with a shortage of foreign exchange, according to Aminu Gwadabe, president of the Association of Bureau de Change Operators of Nigeria (ABCON), who voiced the concern.

Nigeria’s reliance on FPI inflows is under distress as the appetite for Nigerian one-year treasury bills has been on a steady decline despite CBN efforts to raise yields.

The oil flow had to be rerouted immediately after the explosion caused a huge fire at a portion of the pipeline.

Nigeria’s oil output peaked in 2024 at 1.7 million barrels per day. The Federal Government stated its goal to increase that significantly by about 1 million barrels per day in the next two years.

However, oil theft and pipeline vandalism make such optimism almost impossible to achieve, casting a bleak outlook on the naira.

However, the Nigerian naira’s relative stability in the first quarter helped the recent decline in Nigeria’s inflation rate.

NBS data revealed the country’s inflation rate moderated to 23.18 per cent in February from 24.48 per cent in January, marking the first slowdown in 2025. Lower energy prices, a stable naira, and the rebasing of Nigeria’s inflation index all contributed to the decline.

The dollar appreciated as traders placed bets that there would not be any short-term interest rate cuts, but concerns about higher tariffs and slower growth tempered risk appetite.

U.S. President Donald Trump stated on Thursday that a rate cut by the Fed “would be great.”

However, the central bank indicated no such intention, citing increased economic uncertainty, Trump’s tariffs, and the direction of inflation. Additionally, the Fed lowered its growth outlook and increased its inflation forecast for 2025.

Geopolitical uncertainty remains high, with tensions escalating in Turkey and Gaza, and no obvious route to a ceasefire in Ukraine. Investors are turning to Treasuries for safety due to economic and geopolitical uncertainty, which is causing U.S. bond yields to dip.

The strong demand for U.S. bonds is supported by the belief that yields will decline once the Fed begins to cut rates. The American equity markets trade cautiously following the Fed’s policy decision, while European markets exhibit mixed sentiment.

The strong demand for U.S. bonds is supported by the belief that yields will decline once the Fed begins to cut rates. The American equity markets trade cautiously following the Fed’s policy decision, while European markets exhibit mixed sentiment.