Naira likely to break below N1,300/$ amid high FX supply

The Nigerian naira is expected to potentially fall below N1,300 per dollar due to a surplus of foreign exchange (FX) in the market. The Central Bank of Nigeria (CBN) has projected the naira to trade within a 6-month target range of N1,250/$ to N1,350/$. However, this lower bound, known as the Bullish Floor, could see less demand for the naira as market participants anticipate intervention from the CBN or view it as a necessary move for portfolio rebalancing.

On the other hand, the Bearish Ceiling, at N1,350/$ to N1,400/$, represents the maximum limit for the naira's value. This ceiling is primarily influenced by the inflow of dollars, which can occur through export proceeds, foreign portfolio investments, or a liquidity injection from the CBN. When the naira crosses this threshold, the rate will revert back into the target corridor.

The CBN's regular interventions have led to a significant limit-sell order for USD in the National Foreign Exchange Market (NFEM), allowing excess demand for dollars to be absorbed and transferred into liquidity for the naira. This process helps regulate intraday price fluctuations and brings the currency into a state of consolidation, preventing drastic movements.

Nigeria's external reserves are primarily driven by oil revenues. If oil prices drop, the country's external account will be strained, and the CBN may lack sufficient resources to support the naira's stability. The CBN's gross external reserves stand at $55 billion, while net foreign exchange reserves amount to $46 billion.

In response to declining interest rates, the Monetary Policy Committee (MPC) cut the Monetary Policy Rate (MPR) by 350 basis points, from 26.5% to 23.0%. Although rate cuts typically weaken a country's currency due to a smaller differential in interest yields, the medium-term outlook for the naira remains cautiously optimistic, with a potential range of N1,320/$ to N1,380/$.

The CBN's actions to rebuild net reserves demonstrate its ability to defend the currency and manage foreign exchange obligations, as well as absorb unexpected shocks. This reassures foreign investors and domestic importers regarding the availability of FX on demand, leading to reduced panic buying, hedging through illegal channels, and speculation in the parallel market.

However, seasonal spikes in import demand can generate sudden surges in dollar-buying orders. If these demands outpace the available market supply, the naira's value could quickly surpass the N1,350/$ resistance level. The reduction of the MPR to 23.0% was aimed at decreasing borrowing costs for the private sector and lowering debt servicing commitments.

Despite the rate cuts, NGN bond yields remain competitive, offering a net real yield of around 3% and providing an enticing proposition for foreign investors and portfolio investors seeking inflation-adjusted yields.

Diaspora remittances and rising current account surpluses continue to bolster Nigeria's FX supply, contributing to the nation's overall liquidity and stability.