The Nigerian naira has done relatively well this year, despite the recent sell-off in emerging markets currencies amid the US war against Iran. The USD/NGN exchange rate dropped to 1,358 on April 10, down by 20% from its highest point in 2024.
Why the Nigerian naira has soared
There are at least three main reasons why the Nigerian naira has done well this year. The most notable one is that the Central Bank of Nigeria (CBN) has maintained its support for the currency by leveraging its dollar holdings.
Data shows that the amount of Nigeria’s dollar reserves have slipped in the last 17 consecutive days, bringing the amount to $48.94 billion. This is the lowest the figure has been since February this year.
The bank has also boosted the sale of its high-yield short-term debt, a move intended to attract US dollar inflows.
At the same time, the bank has maintained high interest rates in the country, making the currency more attractive to investors in the money market funds. It slashed interest rates by 0.50% in the last meeting, bringing the benchmark rate to 26.50%.
In contrast, the Federal Reserve has maintained interest rates between 3.50% and 3.75%, creating a good carry trade opportunity. A carry trade is a situation where investors borrow a low-yielding currency to a higher-yielding one.
Meanwhile, Nigeria has largely been immune during the Iranian war because of the large Dangote refinery that is refining thousands of barrels a day. With the Strait of Hormuz closed, many African governments turned to Nigeria for fuel.
Most notably, Dangote’s refinery is now buying more crude oil from Nigeria, with the amount of supply from the Nigerian National Petroleum rising to ten cargoes in March. At full capacity, the refinery can produce enough petroleum for the country and even have enough to export.
Meanwhile, there are signs that the Nigerian economy is doing well, with the recent data showing that the annual inflation dropped to 15% in February from 26.3% last year. Also the most recent data showed that its economy expanded by 4.07% YoY in the fourth quarter from 3.98% in the same period.
What next for the Nigerian naira?
The daily chart shows that the USD/NGN exchange rate has plunged in the past few months. It has slipped from a high of 1,691 in November 2024 to the current 1,358.
The pair has dropped below the 50-day and 200-day Exponential Moving Averages (EMA). It has remained below the Supertrend indicator and the Ichimoku cloud. Therefore, the pair may continue falling, potentially to the psychological level at 1,300.
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