By Sodiq Adelakun
The naira has been experiencing a tumultuous week, with the currency hitting a fresh low in the official market due to high demand for safe-haven currencies.
The naira’s decline on the unofficial market has been even more severe, with the exchange rate being quoted at N1,186/$1 at the P2P, where forex is traded covertly through the crypto market.
The Central Bank of Nigeria (CBN) has stated its intention to periodically intervene in the foreign exchange market to support liquidity. However, speculators continue to have sway, particularly after an eight-year ban on certain items obtaining dollars on the official market was lifted.
The US dollar has performed well against a variety of other currencies, but over the past week, it has declined against the euro, gold, silver, and Bitcoin. US stocks have also fallen, and the 10-year US Treasury yields have rallied to a 16-year high.
Despite the CBN’s efforts to support liquidity, the naira’s decline is a cause for concern for Nigeria’s economy. The country relies heavily on oil exports, and a weaker currency could lead to inflation and a decrease in foreign investment. As such, the CBN will need to continue to monitor the situation closely and take appropriate action to stabilise the currency.
Following President Tinubu’s criticism of monetary policy actions and his vow to end the country’s multiple exchange-rate system, the CBN loosened foreign exchange controls in the middle of June.
However, Nigeria’s FX market remains illiquid despite the CBN’s decision to remove restrictions on the dollar supply coupled with uncleared FX backlogs.
Nigeria has been grappling for years to increase the supply of dollars since declining oil revenue put its foreign exchange reserves in jeopardy.
Consequently, speculators in Nigeria’s FX market amplify their appetite for the greenback amid the United States economy’s resilience and the tight labour market.
Federal Reserve Chairman Jerome Powell recently suggested that further interest rate increases may be necessary.
Concerns about interest rates rising steadily increased as benchmark Treasury yields came dangerously close to the 5 percent mark.
President of the Cleveland Federal Reserve, Loretta Mester emphasised the significance of reducing constant queries about the upcoming decisions of the central bank on Friday.
“Limiting speculation about federal funds rate hikes at every meeting could offer helpful stability to firms and markets adjusting to forthcoming hikes.”
Mester is in favour of a second rate increase this year, which would bring the federal funds rate to 575 percent. She stated that the central bank is close to the end of its rate-hiking cycle despite the possibility of an additional increase.
The Fed official, who is scheduled to vote in the Fed’s interest-rate committee in 2024, attested to the fact that the Fed has made tremendous strides in reducing inflation.
She also forecasted a slowdown in the job market and an economic downturn. In 2012, Mester recognised the contribution of Charles Evans in establishing particular standards for interest rate hikes.
That being said, the Federal Reserve’s future path regarding interest rate hikes remains unclear; federal funds futures assign only a 2 percent chance of a rate hike next month and a 25 percent chance by year’s end.
This lack of clarity has contributed to increased market volatility amid the intensifying conflict in Israel.