..As U.S fed decision looms
By Charles Ebi
The exchange rate between the Naira and the US Dollar depreciated to N1,656.49 at the official Investor and Exporter,I&E, window on Tuesday, September 17, 2024.
This marks a 7.12% decline from N1639.20 on September 13, 2024, despite news that inflation had slowed by 1.25%, dropping from 33.40% in July to 32.15% in August 2024.
The Naira’s recent performance has been marked by fluctuations, hovering around the 1,600 level due to volatility.
However, there is cautious optimism that the Naira may strengthen if the U.S. Federal Reserve cuts interest rates on September 18, 2024, which could weaken the dollar.
Data from the Nigerian Autonomous Foreign Exchange Market ,NAFEM, highlighted that the local currency was sold at N1,656/$1, higher than the N1,546/$1 recorded on Monday.
However, in the parallel market, the Naira appreciated by N5, trading at N1,660/$1 compared to the previous rate of N1,665/$1.
This marks the second consecutive month of lower headline inflation, attributed to reduced food prices during the harvest season.
According to the Nigerian Bureau of Statistics ,NBS, headline inflation for August was 32.15%, down from 33.40% in July. Food inflation also decelerated, reaching 37.52% compared to 39.53% in July 2024.
On Tuesday, the U.S. Dollar appreciated against most currencies, including the Naira, as higher-than-expected U.S. retail sales data was released, raising the possibility of a less aggressive Federal Reserve.
The U.S. Dollar Index, which tracks the dollar against a basket of six currencies, showed a slight increase, recovering from earlier lows this year. While some market pricing suggests a 50-basis point rate cut, most analysts predict a more modest 25-basis point cut.
The U.S. labor market continues to strengthen, suggesting that further relaxation of monetary policy could support economic growth. However, this high optimism may indicate that the Federal Reserve might continue raising interest rates, albeit at a slower pace.
The U.S. Commerce Department reported a modest 0.1% rise in retail sales in August, fueling hopes that the economy has stabilized through much of the third quarter.
Investors are now awaiting the Federal Reserve’s decision on interest rates, expected at the conclusion of its policy meeting later today. The last time the Fed cut rates was in response to the COVID-19 pandemic in March 2020.
While Nigeria is expected to see foreign capital inflows later in the year, it is unlikely the Federal Reserve will make aggressive rate cuts, given the current market conditions.
The Dollar index, which measures the dollar against major currencies like the yen and euro, increased by 0.199% to 100.90 on Tuesday.
Fed funds futures currently reflect a 63% chance of a 50-basis point rate cut, up from 30% a week ago, while the likelihood of a 25-basis point cut is at 37%. These probabilities have shifted after reports reignited discussions of potential aggressive easing measures.
Other U.S. economic data released on Wednesday suggest that the Federal Reserve may find it challenging to implement aggressive rate cuts. U.S. business inventories increased by 0.3% in July, and factory production rebounded in August.
Present fundamentals indicate that the market is already pricing in some rate cuts over the next several months, though some analysts warn that the market may be moving ahead of itself.
Recall that Since mid-July, the naira has fluctuated within the N1,600 range, briefly appreciating to N1639.20 by September 13, only to fall further to N1656.49 by September 17.
During Tuesday’s session, the naira moved between a high of N1,665.00 and a low of N1,565.00 before closing above N1,600 again.
Year-to-date, the naira has depreciated by about 76%, driven by inflationary pressures and rising demand for the dollar.
Meanwhile, Nigeria’s external reserves increased from $36.305 billion on August 30 to $36.730 billion by September 10.
Nigeria’s headline inflation eased to 32.15% in August 2024, down from 33.40% in July.
The Nigerian National Petroleum Corporation Limited ,NNPCL, announced that petrol sales in Naira by the Dangote Refinery will begin on October 1, 2024.
If the US Federal Reserve cuts interest rates as expected on September 18, 2024, the weakening dollar could provide an opportunity for the naira to appreciate.
Despite recent volatility, a more positive outlook for the Naira is emerging as global markets adjust.
The combination of slowing inflation and decreasing fuel scarcity could boost economic sentiment, potentially strengthening the Naira.
If the US Federal Reserve cuts interest rates on September 18, leading to a weaker dollar, the Naira may have an opportunity to recover from its recent lows.
However, strategic economic decisions will also be key in driving the Naira’s recovery, especially in the face of a weakened dollar.
