The Dollar has pushed the Naira above N600/$ due to the US Fed’s hawkish stance and the bullish momentum of the dollar index.
This week, all eyes will be on the Federal Reserve, as Chairman Jerome Powell is likely to announce a rate hike as well as new details on the Fed’s $9 trillion balance sheet unwinding plan.
The dollar rose towards a 20-year high on Monday as the euro struggled around the $1.05 mark. At the time of writing, the dollar index was trading a $103 up 10% within the last 6 months according to Nairametrics.
Due to the US dollar integration into the global economy, its gains are putting more pressure on businesses and governments as they prepare for rising interest rates on their dollar debt, particularly in nations like Nigeria that rely heavily on imports.
At the time of writing this article, the exchange rate at the peer-to-peer forex market was trading at N591.2/$1 down from closing at N565/$1 on December 31, 2021. This is indicative of a N26 depreciation YTD.
In an environment where people have become accustomed to ultra-easy credit, higher rates are likely to cause significant volatility. It might also boost the Dollar’s yield appeal, boosting demand for the greenback even more. Hence, servicing sovereign bonds issued in dollars could be a difficult task for countries that have dollar debt.
Furthermore, if economic activity weakens, developing economies’ currencies may suffer a double blow as demand for risky assets dwindles.
Unfortunately, Nigeria’s trade fundamentals haven’t changed: Nigeria’s capital inflows plummeted to a four-year low of $9.66 billion in 2020, only to drop further to $6.7 billion in 2021.
As Nigeria went through its historical trading deficit, international commerce remained a vital concern. Nigeria’s international trade balance for 2021 has slipped to a record-high deficit of N1.94 trillion. Nigeria’s exports increased by 51% to N18.91 trillion in 2021, compared to N12.52 trillion the previous year.
However, the increase in export revenues was insufficient to compensate for a 64.1% increase in import expenses, which totalled N20.84 trillion. In 2021, a $5.26 billion negative balance of payment was created as a result of the FX outflows, placing even greater pressure on the local currency and necessitating the use of the external reserve.
Omotoso Oluwaseyi, Forex Analyst at WestbellisyFx stated that the expected hawkish stance of the US Fed is expected to depreciate the Naira further.
He said, “If there is an increase in the federal funds rate by 50 basis points, raising the target range from the current 25-50 to 75-100 basis point, this implies that an increase in the dollar rate would push the dollar/naira exchange to N600 – N620 per dollar as compared to N580 – N585 it was before.”
The volatility in the FX market, according to Anwal Usman, a BDC operator in Lagos, is due to a shortage of forex supply, while demand has risen sharply in recent weeks.
He said, “Dollar demand has increased significantly, especially since the election is fast approaching, which is why the exchange rate has gone up.”
