The Nigerian naira continued its positive trajectory against the U.S. dollar on Tuesday, extending the gains it has seen since the start of the week. This appreciation offers a glimmer of stability in Nigeria's foreign exchange market.
At the Nigerian Autonomous Foreign Exchange Market (NAFEM), the official exchange rate for the naira closed at N1,579.28 per dollar on Tuesday. This was a slight but notable improvement from the N1,581.58 recorded on Monday. The momentum had already begun on Monday, when the currency gained N4.57 from Friday’s closing rate of N1,586.15, marking a strong start to the trading week.
Parallel Market Also Sees Gains
The positive sentiment wasn't confined to the official market. In the parallel market, the naira also showed strength, closing at N1,595 per dollar on Tuesday, an improvement from N1,615 on Monday. This followed a significant gain on Monday as well, where the currency strengthened by N13 from Friday’s N1,628 per dollar. The narrowing gap between the official and parallel market rates is often seen as a positive sign of market convergence and reduced arbitrage opportunities.
Drivers Behind the Appreciation
Analysts are largely attributing this sustained appreciation to a combination of factors. A key driver appears to be an increase in foreign portfolio inflows, signaling renewed investor confidence in the Nigerian economy. Additionally, the impending Eid el-Kabir holidays, scheduled for June 6 and 9, 2025, are believed to be contributing. The expected holiday-driven demand for the naira is likely pushing up the supply of dollars across various channels as individuals and businesses exchange foreign currency for local spending.
Understanding FX Inflow Dynamics
Despite the recent appreciation, a report from Coronation Merchant Bank's research team highlighted a drop in total foreign exchange inflows at NAFEM. Inflows decreased to $1.04 billion last week, a notable decline from $4.42 billion the previous week. However, the composition of these inflows offers valuable insight.
Foreign portfolio investors (FPIs) were significant contributors, accounting for 32.02 percent of the total inflows. Non-bank corporates followed closely, making up 29.49 percent. The Central Bank of Nigeria (CBN) contributed 19.71 percent, while exporters added 18.33 percent. Other sources constituted a small remaining fraction of 0.45 percent. This breakdown underscores the importance of FPIs in boosting liquidity in the official window, even as overall inflows saw a weekly dip.
The recent gains in the naira suggest an improved foreign exchange supply environment and an uptick in investor confidence. However, the sustainability of this positive trend will largely depend on consistent foreign exchange inflows and ongoing supportive monetary policy from the CBN.
Will these factors continue to align to support the naira's upward trajectory?