The naira traded in the N1500 range against the greenback at the parallel market, while the U.S. dollar index rallied to its eight-week high in the broader market.
The naira temporarily lost its N1,500 support on the black market amid an uptick in demand for the haven currency. Price action highlighted that the naira is still in price discovery mode.
Nonetheless, enhanced oil receipts and multilateral donor financing for Q3 of this year will provide key support for the naira at the N1,500 level.
According to projections by Fitch Ratings, an international credit rating agency, the Nigerian currency is expected to end the year at N1,450/$.
Naira’s Fundamentals Brighten
The naira exhibited some relative stability with the US dollar this June. FMDQ data revealed the naira has only moved between N1,473 and N1,485 against the US dollar this month.
Its 100-day price swings are at their lowest since November, and its 10-day rolling volatility is at its lowest point in a year amid a hawkish Nigerian apex bank.
The Nigerian apex bank is aggressively influencing the foreign exchange market to improve liquidity, which is a crucial part of this effort. The CBN is also implementing monetary tightening measures to maintain the value of the local currency.
Notably, in an effort to increase transparency, the central bank abandoned exchange rate ceilings and adopted market-based limitations.
The CBN hiked its benchmark interest rate to a record 26.25% to draw dollar inflows, reduce volatility, and slow inflation, which increased in May to a 28-year high of 33.95%.
To calm the market, the regulator is combining a 750 basis point rise overall this year with a significant naira liquidity mop-up through monthly bond sales, as well as dollar inflows from external lenders.
Afreximbank recently gave Nigeria $925 million for the third tranche of a $3.3 billion crude oil-backed prepayment facility, intended to boost the availability of hard currency on the local foreign exchange market.
The World Bank approved $2.25 billion in aid this month to support Nigeria’s economic reforms, which should further boost foreign exchange liquidity.
U.S. Dollar Index Outlook
The U.S. Dollar Index (DXY) is rising and has a decent chance of securing gains for a third straight week.
Positively, there are no significant alterations to the levels that currency traders should be cautious of. Traders are watching 105.9 index points, which set off a rejection at the beginning of May and act as resistance once more. The largest obstacle is at 106.51 index points, the peak from April 16 this year.
On the downside, the trio of Simple Moving Averages (SMA) acts as support, with the 105.52 level as the initial support. The 55-day SMA, which is at 105.14, comes first and protects the 105.00 value.
The 100-day and 200-day SMAs establish a double layer of support to support any declines, a little lower, near 104.61-104.48 index points. If something is broken in this region, the index will likely consolidate at 104 index points.
