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Has Nigeria’s black market exchange rate discovered an anchor price?

Has Nigeria’s black market exchange rate discovered an anchor price? %Post Title






















After a tumultuous and volatile November, it appears Nigeria’s black market exchange rate may have found an anchor price where buyers and sellers feel more comfortable quoting (see chart below).

The exchange rate between the naira and dollar depreciated to as high as N875/$1 in early November 2022 before sliding to about N680/$1 a few days earlier. It went back above N700/$1 in a matter of days.

The exchange rate has now depreciated at around N740/$1 in the last week, the first time in months that the price has been fairly stable. A quick glance at peer 2 peer markets where the currency is traded using stablecoins also reveals an exchange rate of about N740/$1.

So has the black market rate discovered an anchor price?

Predicting the direction of Nigeria’s foreign currency exchange rate is tall order especially when you consider the many dynamics that determine rates. However, from the data available to Nairametrics, exchange rates often oscillate around the 2-5% depreciation or appreciation if the price doesn’t change for about a week to two weeks.

This also depends on other dynamics that typically affect exchange rates such as a sudden announcement that may have jolted the market or due to factors outside of the country. One major factor that we took note of during the week is the fact that the last monetary policy committee meeting ended without any major talking points that jolted the forex market.

For example, at the meeting in September, the central bank Governor, Godwin Emefiele announced plans to change the N200, N300, and N500 naira notes causing a stir in the economy that also spread to the foreign currency markets. Nairametrics checks also reveal periods of great spikes or volatility in the exchange rate often coinciding with controversial statements at the MPC meetings.

However, at the meeting held on the 21st and 22nd of November 2022, the central bank governor avoided making remarks that could jolt the market. This perhaps explains why the exchange rate strengthened over the last two weeks and then stabilized most of last week.

Another reason we think may have slowed the depreciation is some of the policies of the central bank that have resulted in a hike of interest rates for risk-free securities. The one-year treasury bill rose to as high as 14.84% at the last auction in November.

Investors also poured money into the stock market in November resulting in a gain of 8.72% for the month of November. We also gather that the pressure to move most of the naira notes to the black market in exchange for dollars met stiff challenges from BDC operators. Some of them are worried that the EFCC may come after them asking for the source of their earnings. This appears to have snuffed out demand albeit in the short term.

But as we approach the holiday season, it is likely that a significant number of Nigerians will travel on holidays piling new demand on the black market. However, it is also expected that Nigerians in the diaspora will return for the Christmas holiday aiding supply.

Again, predicting the direction of the exchange rate is dicey but data suggest a moderate rate movement occurs in December. We are also paying close attention to the external reserves which fell to about $37.1 billion in November.

If the rates hold between N735-N745 to the dollar by the end of this week, then we believe that is clearly an anchor price that the market is comfortable with.  (Nairametrics)

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