Daily Insight: FX Rates – Is the Party Over?

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After an extended period of FX volatility between 2015 and April-2017, which saw the naira depreciate to a record high of N500/$ at the parallel market, the introduction of the Investors’ & Exporters’ (I&E) window by the CBN has broadly stabilized the currency market over the last 13months. However, we have observed sustained pressure on the naira against the dollar over the last three weeks; the parallel market rate has depreciated from N361/$ in April to N365/$ in May, I&E/NAFEX rate is down 0.4%Mtd to N362/$ while the official rate shed 10bpsMtdto N306.0/$. Accordingly, this creates a nostalgic sensation of a recent past.

The recent pressure on FX rates is traceable to the following; firstly, funds repatriation by foreign portfolio investors amid rising US treasury yields, as indicated by the sharp declines in the equities market (down 6.4% MTD), is a factor. Additionally, elevated demand for dollars driven by summer holiday travelers and demands
attributable to political spending, ahead of the 2019 election, account for other factors.

Although fears of a potential reduction in oil prices is a concern, the CBN is in a better position to curtail the risk of escalating FX rates, given its current reserves of $47.7bn. Nevertheless, marginal depreciation around the current band is probable.

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