The Nigerian naira has resumed its downward trend as the recent surge faded. According to TradingView and Google, the USD to NGN exchange rate stood at 1,380, much higher than last month’s low of 1,135. The black market rate has jumped to 1,430.

The Nigerian naira has had a rollercoaster this year, moving from the worst-performing currency to one of the best. This happened as it jumped by over 30% from its lowest point in February to its highest swing in April.

USD/NGN weekly chart

The Nigerian naira surged as investors cheered the Central Bank of Nigeria (CBN) actions. After spending months in the sidelines, the central bank started hiking interest rates in February. It moved the benchmark rate from 18.75% to 22.75%. It then hiked rates to 25.75% in March in a bid to fight the stubborn inflation.

Still, the challenge is that Nigerian fixed-income investors are still losing money to inflation. The most recent data showed that the headline Consumer Price Index (CPI) rose to 33.20% because of food and energy costs. These investors are still losing over 5.5% when you include taxes.

This is in contrast to what is happening in other countries. In the US, the benchmark interest rates sits at 5.50% while the headline Consumer Price Index (CPI) stands at 3.5%. In Europe, ECB’s interest rate stands at 4.5% against the annual inflation rate of 2.4%.

In Kenya, the CBK’s interest rate is at 13% while inflation has dropped to 5%. This means that investors in government debt are making about 8% annual returns, which explains why the Kenyan shilling has spiked.

The case of the Nigerian naira is similar to what is happening in Turkey, where the actions of the central bank have not helped to salvage the lira. Inflation in the country stands at about 70% while interest rates are at 50%. 

The Nigerian naira also jumped as investors believed that the currency was severely undervalued. They had just seen the Kenyan shilling skyrocket from 1bout 160 to 130. Analysts at Goldman Sachs noted that the naira could rise to about 1,000 against the US dollar.

All these factors, coupled with reforms by the Nigerian government, have helped to support the naira. As a result, dollar inflows have continued rising. Data by the central bank showed that dollar inflows rose to over $2.3 billion in February compared to $3.9 billion in all of 2023.

The main reason why the Nigerian naira is falling now is the interest rate and inflation spread in the country’s interest rates and inflation figures.

The other reason is on profit-taking among Nigerian naira holders who have started to move back to the US dollar. This is a common occurrence as we have seen with other currencies. For example, after strengthening to 125, the Kenyan shilling has now retreated to 134.

Further, there are lingering concerns about the Nigerian economy. PwC estimates that the economy will grow by 3.1% in 2024 while the IMF sees a growth figure of 3.3%. That is an improvement from last year’s 2.8%.

The Nigerian naira also tumbled because of the strong US dollar. Data shows that the US dollar index rose to $106 last week as inflation and Fed fears rose. On the positive side, the index has retreated to $105.2 after the weak US jobs numbers. 

Signs that the Fed will start cutting rates, coupled with peaking inflation in Nigeria, could lead to more naira demand.

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