Has Nigeria’s black exchange rate discovered an anchor price?

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After a tumultuous and volatile November, it appears that Nigeria’s black market exchange rate may have found an anchor price that buyers and sellers feel more comfortable trading at (see chart below).

The exchange rate between the naira and the dollar depreciated to N875/$1 in early November 2022 before dropping to around N680/$1 a few days before. It was back above N700/$1 in a matter of days.

The exchange rate has depreciated by around N740/$1 in the last week, the first time in months that the price has been fairly stable. a quick look at pair 2 pair markets where the currency is traded using stablecoins also reveals an exchange rate of approximately N740/$1.

So has the black market rate discovered an anchor price?

Predicting the direction of Nigeria’s foreign currency exchange rate is a difficult task, especially when considering the many dynamics that determine rates. However, based on the data available for Naijaonpoint, exchange rates often hover around 2-5% depreciation or appreciation if the price doesn’t change for about a week or two weeks.

This also depends on other dynamics that normally affect exchange rates, such as a sudden announcement that may have shaken the market or due to factors outside of the country. One important factor we took note of during the week is the fact that the last meeting of the monetary policy committee ended without any major talking points to shake up the currency market.

For example, at the September meeting, central bank governor Godwin Emefiele announced plans to change the N200, N300 and N500 naira notes, causing a stir in the economy that spilled over into currency markets as well. Naijaonpoint’s checks also reveal periods of large spikes or volatility in the exchange rate that often coincide with controversial statements at MPC meetings.

However, at the meeting held on November 21 and 22, 2022, the central bank governor avoided making comments that could shake the market. This perhaps explains why the exchange rate strengthened over the past two weeks and then stabilized for most of last week.

Another reason that we think may have slowed the depreciation is some of the central bank’s policies that have resulted in an increase in interest rates for risk-free securities. The one-year Treasury bill rose to 14.84% in the last auction in November.

Investors also poured money into the stock market in November, resulting in a gain of 8.72% for the month of November. We also deduce that the push to move most naira notes to the black market in exchange for dollars was met with stiff challenges by BDC operators. Some of them are worried that the EFCC will come after them and ask about the source of their income. This appears to have eliminated demand, albeit in the short term.

But as we approach the holiday season, significant numbers of Nigerians are likely to travel for the holidays, accumulating new demand on the black market. However, Nigerians in the diaspora are also expected to return for the Christmas holiday relief supply.

Again, predicting the direction of the exchange rate is risky, but the data suggests a moderate exchange rate movement in December. We are also paying close attention to foreign reserves which fell to around $37.1 billion in November.

If rates hold between N735-N745 per dollar at the end of this week, then we think that is clearly an anchor price that the market is comfortable with.

…Has Nigeria’s black exchange rate discovered an anchor price? Read more about… Naijaonpoint.

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