FBNQuest projects N445/$1 official market exchange rate

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Against the background of the naira’s sharp decline against the dollar at the parallel market in recent days, analysts at FBNQuest research have predicted that the local currency will likely depreciate to N445 per dollar at the Nigerian  Autonomous Foreign Exchange Fixing (NAFEX) window by the end of this year.

 

The analysts, who stated this in a report released at the weekend, noted that while the naira deprecation against the dollar at the NAFEX window in recent days has not been as significant as its collapse against the greenback at the parallel market, the factors responsible for the local currency’s weak ness will result in its falling to N445/$1 by year-end at the official window (NAFEX).

The NAFEX window, also known as the Investors and Exporters’ (I&E) window, is a FX market segment for investors, exporters and end-users that allows FX trades to be made at a market-determined rate. In May last year, the Central Bank of Nigeria (CBN) adopted the NAFEX rate and started post-  ing  it as the official exchange rate on its website.

The FBNQuest analysts’ report partly read: “Over the last few days, Nigerian newswire have been dominated by the naira’s capitulation to the US dollar at the parallel market. Based on our channel checks, the naira fell eight per cent to a record low of N720/USD between last Friday and Wednesday, before recovering some lost ground yesterday to close at c.N715.

 

The sharp decline of the naira (in the parallel market) brings its year-to-date (ytd) return to roughly -20 per cent. “In contrast to this sharp volatility seen on the parallel market, the naira exchange rate on the NAFEX window – which is the government’s official window – was relatively stable over the week, hovering between c.N427 and N431 or within a band of +/-2 per cent. N194 billion.

 

“Some might argue that the naira’s depreciation of c.-1.4 per cent ytd on the NAFEX window is quite modest in view of the appreciation of the US dollar this year which has been driven by aggressive rate hikes totalling c.225bps by the US Federal Reserve and an unprecedented quantitative tightening cycle.

 

“While it is impossible to accurately forecast exchange rates since it is affected by a number of factors, our forecast is for a year end-22 exchange rate of N445/USD on the NAFEX window.”

Commenting on the volatility witnessed at the parallel market in the last few days, the analysts attributed it to the “surge in fx demand (which) is largely related to seasonal factors such as people vacationing during the summer holiday season and payment of school fees by students studying abroad.”

They also noted that “one of the major challenges with the naira’s valuation includes the lack of export diversification and the persistently high inflation levels in Nigeria, especially in the last few years.

According to the latest balance of payment data from the CBN, proceeds from oil and gas sales accounted for c.89 per cent of the value of merchandise exports in Q1’22.

“Losses in national productivity caused by insecurity, inadequate electricity, and poor infrastructure are also related causes.”

According to the analysts, although the CBN has established initiatives like the RT 200 programme that aims to enhance credit availability to certain sectors of the economy in order to boost foreign exchange inflow from non-oil exports, “the fiscal authorities must take additional steps to resolve the structural issues.”

 

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