The naira has lost ground, breaking the N16000/$ support level against the dollar in the official foreign exchange market, with the dollar index remaining firm amid a less dovish Fed outlook.
Data from the Nigerian Autonomous Foreign Exchange Market (NAFEM) revealed that the local currency depreciated by N106.05, trading at N1,658.97/$1, compared to Monday’s rate of N1,552.92/$1.
Foreign investors welcomed the devaluation of the naira and the removal of gasoline subsidies. However, for the general populace, these measures have exacerbated inflation and worsened the cost of living, leading to protests in recent months and a violent response from security forces.
Chief Economist Indermit Gill stated, “The naira’s real exchange rate is at its most competitive in at least 20 years.” Speaking Monday in Abuja at the Nigerian Economic Summit Group, he declared, “This is a great opportunity for the private sector.”
According to Gill, the federal government’s reforms in the country’s FX market and energy sector from the previous year have saved Africa’s largest oil producer from fiscal collapse. Decades of mismanagement have left Nigeria with the highest percentage of people living in abject poverty globally. A World Bank analysis indicates that the Nigerian naira is among the least-performing currencies in Sub-Saharan Africa in 2024. The naira has lost approximately 43% of its value from January to August 2024, ranking it among the weakest currencies in the region, alongside the South Sudanese pound and the Ethiopian birr.
Taiwo Oyedele, head of the Presidential Fiscal Policy and Tax Reforms Committee, claims that international taxes paid by Nigerian businesses amount to an estimated $3.5 billion a year, contributing to the naira’s decline.
Strong jobs and CPI data have tempered expectations of a quick Fed relaxation, predicting a total reduction of 125 basis points over the next 12 months. Fed governors Kashkari and Waller have issued warnings, indicating a slower pace of rate cuts than initially anticipated.
The FedWatch Tool from CME Group (NASDAQ: CME) shows that traders are betting 92% on a 25-basis-point decrease when the Fed makes its next policy decision on November 7, with an 8% chance of no change. Over 29% of traders had predicted a substantial 50-basis-point drop a month ago. This sentiment also reflects traders’ calculations regarding a potential victory for former President Donald Trump, considered dollar-positive, and pricing in rate reductions from the Federal Reserve.
Recent price action for the dollar index indicates a positive outlook as indicators gain momentum. After surpassing the 100-day SMA at 103.8 index points, the index is approaching the 200-day SMA, which will be a significant resistance level. However, the Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI) indicators are flashing overbought signals, suggesting potential profit-taking.
The market is still pricing in 50 basis points of easing this year, but central bankers’ comments overnight were more hawkish. Raphael Bostic of the Atlanta Fed stated that he only plans to lower interest rates by 25 basis points this year, while Mary Daly of the San Francisco Fed further disclosed that “one or two” rate reductions in 2024 would be “reasonable.” Investors will be monitoring the European Central Bank meeting on Thursday; however, the market impact may be limited if policymakers deliver the currently anticipated 25-basis-point rate decrease and President Christine Lagarde withholds too many hints about the future outlook for interest rates