Demand for foreign currency remained elevated for a second consecutive week, piling fresh pressure on the naira despite a combined $250 million intervention by the Central Bank of Nigeria (CBN) over the past two weeks.
The naira weakened by 0.5 per cent week-on-week (w/w) to close at N1,380.00/$1 in the official market, reversing the previous week’s gains when it appreciated to N1,373.00/$1 on the back of stronger offshore inflows and a larger $170 million intervention by the apex bank. Market data showed that the CBN followed up with an additional $80 million intervention during the review week in a bid to ease supply shortages. However, the injection proved insufficient to offset elevated demand for dollars from importers, manufacturers and other market participants, resulting in renewed pressure on the exchange rate.
The latest performance suggests that while foreign exchange supply conditions have improved significantly compared to last year, demand for hard currency remains resilient, limiting the impact of official interventions.
Despite the weaker exchange rate, Nigeria’s external reserves continued their upward trajectory, providing a positive signal for the country’s external position. Gross external reserves rose by $217.75 million to $51.74 billion as of July 9, extending their growth streak to nine consecutive weeks after increasing by $170 million to $51.46 billion at the end of June.
The sustained accumulation of reserves is expected to strengthen the CBN’s capacity to intervene in the foreign exchange market when necessary and reinforce investor confidence in the country’s ability to meet external obligations.
Developments in the forwards market also reflected the softer sentiment. One-month forward contracts depreciated by 0.6 per cent to N1,401.47/$, while the three-month, six-month and one-year contracts weakened by 0.5 per cent, 0.6 per cent and 0.5 per cent respectively, indicating that market participants continue to price in modest exchange rate pressures over the near term.
Analysts, however, believe the broader outlook for the naira remains relatively stable, supported by resilient foreign portfolio inflows, stronger market confidence and an improving current account position.
According to Cordros Research, the recent depreciation is largely demand-driven rather than a reflection of weakening macroeconomic fundamentals, noting that the continued build-up in external reserves and sustained foreign investor participation should help cushion the currency against sharper losses.
The firm added that the CBN is expected to maintain measured interventions in the foreign exchange market whenever temporary imbalances emerge, while allowing market forces to play a greater role in determining the exchange rate.
Although the recent interventions have moderated excessive volatility, the firm say the persistence of elevated demand for dollars highlights the need for sustained foreign exchange inflows from exports, foreign direct investment and portfolio investments to improve market liquidity and reduce the economy’s dependence on periodic central bank support.
With reserves at multi-month highs and investor sentiment remaining broadly constructive, the naira is expected to remain relatively stable in the near term, although intermittent demand pressures could continue to trigger modest fluctuations in the exchange rate.