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CBN interventions keep naira range bound at official forex window, currency slides at parallel market

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Traders have reported that The Central Bank of Nigeria (CBN) bank is still intervening in the foreign exchange markets to prevent further losses and maintain stability in the value of the naira.

The currency experienced fluctuations on Wednesday, eventually trading at N782.36 per dollar, remaining within the range of N750-N790 it has held for the past two weeks.

However, bids as low as N800 per dollar were observed the previous day before the central bank stepped in with dollar sales, leading to a resurgence of the parallel market for the currency.

The recent interventions by Nigeria’s central bank have sparked a debate over the interpretation of incoming President Bola Tinubu’s pledge to move toward a flexible interest rate.

Traders are seeking clarification on whether this implies a free float of the currency or a one-off devaluation followed by a weaker peg.

Concerns regarding inflation risks associated with a freely trading currency have prompted traders to question the central bank’s role in setting the value of the naira.

The demand for dollars remains strong, possibly influencing the authorities’ decision to boost liquidity through interventions.

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Central Bank’s Role in Naira Market and Impact on Currency Stability
The Central Bank of Nigeria’s interventions in the foreign exchange market have helped prevent excessive volatility in the naira. However, some traders argue that the dollar sales have been insufficient to suggest that the local currency is being pegged again.

While the central bank has been providing support to maintain liquidity, the interventions have not been consistent. Trades have been reported between N700 and N800 naira per dollar, indicating a lack of strict controls.

The currency has been trading around the N750 level since June 26, and its longer-term outlook depends on the elimination of currency controls and the implementation of comprehensive reforms.

Market Sentiment and Call for Stronger Reforms in Nigeria’s Currency Policy

Market analysts have highlighted the parallel market rate for the naira, which has risen to N800 per dollar, reintroducing a gap with the official rate that had disappeared after the recent devaluation.

Deutsche Bank strategists emphasize the need for stronger reforms to correct the undervaluation of the naira, including measures to boost investor confidence, facilitate capital repatriation, and address import restrictions.

While the currency appears undervalued by more than 20 percent based on the bank’s model, the lack of clarity on monetary policy warrants a cautious approach from investors in the short term, although medium-term prospects remain positive.

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