Naira firms on both FX windows as official, parallel market gap widens to N60/$1

The naira appreciated on both sides of the foreign exchange market yesterday, closing at N1,410 to the dollar at the parallel market and N1,350 to the dollar at the official window. That put the gap between the official and parallel rates at N60 per dollar.

How the rates moved

On Monday, the local currency had closed at N1,415 to the dollar at the parallel market and N1,385.25 to the dollar at the official window. Yesterday’s performance represents an appreciation of N5 and N35.25 at both markets, respectively.

The naira traded flat against the British pound, closing at N1,910 to sterling on Monday and Tuesday.

Rewane: Oil prices and investor sentiment

In an emailed note to investors released yesterday, Financial Derivatives Company Limited, led by economist Bismark Rewane, said the naira has continued to firm on both sides of the market even as the gap widened to N60 to dollar.

Rewane also said Brent rose for a third straight session on Tuesday, trading above $91 a barrel after settling at $90.87 on Monday, its highest since late July.

“The 60-day memorandum of understanding signed on June 17, meant to buy time for a nuclear deal and reopen the Strait of Hormuz, expired without replacement: President Trump said he was not interested in an extension and Tehran ruled out talks to prolong it.”

“Iran and Oman continue to negotiate a protocol for managing traffic through the strait, which normally carries about a fifth of the world’s seaborne oil and LNG, but Washington is not at that table,” he said.

According to Rewane, the price at which crude oil is sold matters so much to Nigeria because an increase in crude oil prices, supported by steady domestic oil production, could lift export inflows, keep reserves buoyant and in turn sustain the naira’s stability. He explained that the naira’s positive performance at the official market will continue to bolster investor sentiment, keeping capital inflows steady in the near term.

“For Nigeria, while this is good news for the capital and current account balances, the volatility and swings in oil prices, and the attendant increase in domestic petrol prices, are likely to keep inflation pressures high. Though the headline print eased in July, the expected increase in logistics, transportation and domestic fuel costs will continue to push food prices up, raising standard of living risks,” he said.

Reforms and what it means for the naira

In 2023, the new administration and the Central Bank of Nigeria, led by Governor Olayemi Cardoso, liberalised the foreign exchange market, stopped central bank financing of the fiscal deficit, and reformed fuel subsidies. The government also strengthened revenue collection and took strategic steps to reduce surging inflation rate.

Since these reforms were implemented, international reserves have increased, and people can now access foreign exchange in the official market. Besides, Nigeria successfully returned to international capital markets last December and was recently upgraded by rating agencies.

For the naira, continued strength at the official market could keep investor confidence and capital inflows steady. However, oil price swings and rising domestic fuel costs are likely to keep inflation pressures high, especially through food and transportation prices.