Stronger Naira Sparks Uncertainty in FX Market as Dollar Savings Decline
The recent appreciation of the naira has sent ripples through Nigeria’s foreign exchange (FX) market, unsettling parallel market operators and triggering a wave of dollar asset liquidations. For the first time since June 2024, the naira breached the N1,500/$ psychological barrier, signaling a potential shift in market dynamics and raising concerns among FX portfolio holders.
The naira’s bullish run, which began earlier this year, has inflicted significant losses on black market traders, with estimates suggesting financial losses ranging between N10 billion and N20 billion. Many traders who stockpiled dollars in anticipation of heightened demand from Nigerians in the diaspora returning to Europe and America were caught off guard as the naira strengthened unexpectedly.
Last weekend, the naira surged to N1,560/$, marking its first rise above the N1,600/$ threshold in eight months. At the official market, the dollar also fell below N1,500/$, a milestone that has fueled optimism about the local currency’s recovery. However, this development has left many market participants wary, with some fearing a repeat of the March/April 2024 positive feedback loop that saw the naira lose significant value.
Market Reactions and Divergent Views
The naira’s rebound has sparked mixed reactions. Pessimists argue that the appreciation is a temporary “dead cat bounce,” a fleeting recovery that could be reversed as market pressures resurface. For instance, Comercio Partners, in its 2025 Macroeconomic Outlook, predicts the naira will end the year at N1,800/$, a 20% depreciation from its current position.
On the other hand, many analysts, including international research organizations, view the naira’s gains as part of a broader correction toward its fair value. Bismarck Rewane, CEO of Financial Derivatives Company (FDC), estimates the naira’s fair value at N1,107/$, suggesting the currency is still undervalued by about 25%. Rewane’s analysis, based on purchasing power parity (PPP), discounts market sentiment but highlights the potential for further appreciation.
Short-Term Drivers of Naira’s Strength
Several factors are contributing to the naira’s short-term gains. The Central Bank of Nigeria (CBN) has maintained a high-interest rate regime, contrasting with the quantitative tightening being wound down in developed economies. The Monetary Policy Committee (MPC) has signaled its commitment to sustaining high rates, with projections indicating no rate cuts until the last quarter of 2025.
Additionally, the “Buy Nigeria” campaign has gained traction, attracting foreign portfolio investments (FPIs) and boosting liquidity in the FX market. Yields on Nigeria’s 12-month bonds, currently close to 20%, are becoming increasingly attractive, especially if inflation slows to below 15%. This could further incentivize foreign investors to pour funds into naira-denominated assets.
Decline in Dollar Savings and Asset Shifts
The naira’s appreciation has led to a noticeable decline in dollar savings, with many investors liquidating their FX holdings to invest in naira assets. A banking source revealed that dollar savings have seen a year-on-year decline of 40%, as investors seek to hedge against the risk of holding depreciating dollars.
The trend is further evidenced by the oversubscription of recent bank recapitalization offers. Fidelity Bank Plc, for instance, reported a 238% oversubscription of its public offer, raising N23.77 billion. Similarly, seven other banks raised a combined N1.3 trillion, with systemically important banks like Access Bank, GTBank, and Zenith Bank leading the charge.
Long-Term Outlook: Challenges and Opportunities
While the naira’s recent performance is commendable, its long-term stability hinges on both domestic and external factors. On the domestic front, Nigeria’s efforts to boost crude refining capacity and reduce FX demand for imports are positive steps. However, the CBN’s ability to implement critical reforms, such as the consolidation of Bureau de Change (BDC) operators, remains a significant test.
The proposed BDC reforms, which require tier-1 operators to raise their minimum capital to N2 billion and tier-2 operators to N500 million, have faced delays. Market watchers argue that these reforms are essential to curbing anti-market activities and enhancing regulatory oversight.
Externally, the dollar’s dominance is being challenged by the growing influence of the BRICS bloc, which now includes Nigeria as a partner member. With BRICS nations accounting for nearly 40% of global GDP (measured by PPP), the bloc’s efforts to reduce reliance on the dollar could indirectly benefit the naira.
However, the dollar remains resilient, with the Dollar Index (DXY) hovering around 108 points, close to its January peak. The new U.S. administration’s policy direction, particularly under President Donald Trump, could further impact global currency dynamics
The naira’s recent gains reflect a combination of policy effectiveness, investor confidence, and favorable market conditions. However, sustaining this momentum will require addressing structural challenges, including FX market reforms and economic diversification. While the naira’s outlook appears promising, the road ahead is fraught with uncertainties, and the CBN’s commitment to reform will be crucial in determining the currency’s trajectory.
For now, the naira’s resurgence is a welcome development, but stakeholders must remain vigilant to ensure that this recovery is not a fleeting moment but the foundation for long-term stability.
Reference
Stronger Naira Sparks Uncertainty in FX Market as Dollar Savings Decline