FXTM Research Analyst Lukman Otunuga writes on what could be the fate of Naira following Federal Reverse (United States of America) decision on interest rate.
The Naira has steadily appreciated against the Dollar this year, with prices currently trading around 365N on the parallel exchange.
While frequent intervention by the Central Bank of Nigeria has played a leading role in the Naira’s stability, rising confidence over Nigeria’s economic recovery has also become a crucial chess piece in the currency’s resurgence.
Although the Naira may continue to stabilise in the short term amid further intervention by the CBN, there still remains a threat of external forces causing downside pressures.
Outside of Nigeria, the major risk event for the Naira will be the outcome of the Federal Reserve meeting, which could create Dollar volatility.
While markets widely expect the Federal Reserve to leave interest rates unchanged in July, investors will be closely scrutinising the policy statement for additional clues on when the central bank plans to normalize its $4.5 trillion balance sheet.
If the policy statement also maintains a hawkish bias towards raising US interest rates once more before year end and the Dollar could receive a boost, consequently pressuring emerging markets, with Nigeria fitting into the category.
While the threat of capital outflows from a resurgent US Dollar may expose the Nigerian economy to downside risks, it should also be kept in mind that a chunk of government revenues are recouped from oil, which is priced in Dollars.
In the longer term, an appreciating Dollar will not only erode away the value of the government’s working revenues, but also enforce downside pressures on the nation’s parallel exchange.