Deutsche Bank Adds Nigeria to FX Watchlist, Sees More Naira Gains

Deutsche Bank has added Nigeria to its frontier foreign exchange monitor and flagged the naira as undervalued, saying the currency is attractive to foreign investors betting on further appreciation against the United States dollar. The German multinational bank said Nigeria’s relatively high real interest rates and improving external position could support the naira’s outlook and strengthen the appeal of local currency assets to carry trade investors seeking to profit from interest rate differentials. Bloomberg reported that strategists and economists at the Frankfurt-based bank consider the naira undervalued, with favourable real interest rates providing attractive opportunities for investors willing to take positions in the currency.

Naira Appreciation In September

Central Bank of Nigeria data showed the naira appreciated by 0.45 per cent against the dollar in September. It strengthened from N1,335.50 per dollar at the end of August to N1,329.50 per dollar at the end of September, a gain of N6 during the month. The move extended the currency’s positive run amid improving foreign exchange conditions and renewed interest in Nigerian financial assets.

The naira’s performance has also fed into returns on local currency investments, including equities and domestic bonds, which have delivered some of the strongest returns globally.

Fiscal Risk And January Elections

Deutsche Bank warned that rising government borrowing and fiscal pressures could threaten the currency’s positive performance, particularly as the country approaches its January elections. “The principal risk to the outlook is from the fiscal side,” the bank said on Monday. It pointed to the Debt Management Office’s bond issuance calendar for the quarter, which signals “elevated issuance levels.”

The lender expects government spending to increase ahead of the January elections, potentially putting pressure on fiscal balances and the domestic financial market. It sees less risk arising directly from the elections themselves, suggesting fiscal policy and borrowing requirements could prove more significant to the naira’s outlook than the political transition.

Regional Peers And Commodity Support

The frontier foreign exchange monitor also tracks Angola’s kwanza and Ghana’s cedi. Deutsche Bank said the two currencies have performed well this year despite the economic consequences of the conflict in the Middle East. Higher crude oil prices have supported the external positions of Nigeria and Angola, while firmer gold prices have benefited Ghana. The commodity price movements have helped strengthen the current account positions of the three economies.

The countries have also benefited from relatively high real interest rates and substantial foreign exchange reserves, factors that have helped attract foreign capital inflows. For Nigeria, higher oil prices can support foreign exchange supply through export earnings, while elevated domestic interest rates can make naira denominated investments more attractive to foreign portfolio investors seeking competitive returns.