Business News

Analysis: Has Nigeria’s exchange rate hit “Price Discovery”?

Exchange Rate Pattern

Two weeks of data from the FMDQ NAFEX closing rate suggest a new pattern is evolving with Nigeria’s exchange rate as Nigerians grapple with local currency depreciation.

The exchange rate between the naira and dollar closed at N1,497/$1 on Friday, May 17, 2024, representing a 2.1% depreciation week to date. It was, however, a 2.5% gain from the N1,593.9 recorded a day earlier, which was the weakest since March 20 this year.

Daily turnover for the week also rose from $608.5 million to $991.9 million, representing a 63% increase week on week.

However, a cursory analysis of the data over the last two weeks establishes a pattern that suggests we may be seeing a new range for the exchange rate. As the chart below indicates, the exchange rate typically settles above N1,400 and below N1,500 to the dollar every Friday.

In fact, the exchange rate has recorded more closing rates above N1,400 and N1,500 every day except for three days. On Monday, May 6, the exchange rate closed at N1,354/$1, while on the 14th and 16th, it closed at N1,520/$1 and N1,534/$1, respectively.

Nairametrics’ prognosis suggests the exchange rate has also settled between this range more than any other in the last eight weeks, indicating we may have hit a price discovery range.

The Central Bank Governor stated earlier in the year that the forex policy was aimed at allowing the exchange rate to achieve price discovery, thus moving to a more market-determined rate.

The NAFEX rate, which is the official benchmark exchange rate used by the central bank, has also closed within this range compared to any other.

The naira has been on a depreciation slide since mid-April when the central bank opined it was not defending the naira amidst a sudden drop in exchange reserves. At the current NAFEX rate of N1,501, the exchange rate has now depreciated by a whopping 40% from N899.3 in December 2023.

Nairametrics recently reported that this depreciation trend aligns with the broader economic challenges faced by Nigeria, including fluctuating oil prices and increasing demand for foreign currency.

As the country navigates these economic waters, the Central Bank’s policies and global market dynamics will continue to play crucial roles in determining the stability and direction of the naira. The apex bank’s monetary policy committee (MPC) meets later this week to deliberate on the matters of the economy with the exchange rate bound to be top on its agenda.

The last time the MPC met at March 26th this year, the exchange rate closed officially at N1,382.95/$1 and went to to hit an a year to date best appreciation of N1,072.74/$1. Nigeria’s external reserves as of May 16th 2024 is $32.6 billions but still below the $33 billion mark.