The naira has recorded a strong rally in recent weeks, climbing to one of its highest levels in almost two years, amid sustained foreign portfolio inflows that could later raise the prospect of profit-taking by investors, a macroeconomic update by CardinalStone has indicated.
The report showed that the local currency appreciated significantly in the official market, gaining 6.9 per cent year-to-date to close at 1,347.78/$ on Monday — one of its strongest performances in two years — signalling improved liquidity within the official foreign exchange window.
Despite the gains, a gap remained between the official and parallel markets. The parallel segment initially traded at a premium of about 5.7 per cent before narrowing to approximately 3.2 per cent after renewed foreign exchange interventions by the Central Bank of Nigeria.
CardinalStone observed that the reduced gap implies “there was more liquidity in the official window than in the parallel market.”
In a related development last week, the Central Bank of Nigeria authorised licensed Bureau de Change operators to access foreign exchange through approved dealers at prevailing market rates, placing a weekly cap of $150,000 per BDC, subject to Know-Your-Customer requirements. The operators are required to dispose of unused balances within 24 hours to discourage hoarding, while cash transactions are limited to 25 per cent of total FX trades, with settlement mandated through licensed financial institutions.
According to CardinalStone, with 82 licensed BDCs in operation, potential supply to the segment could rise to around $50m monthly — still significantly below the over $1bn supplied monthly prior to the COVID-19 pandemic.
The shortfall, the firm stated, reflects “material improvements in the FX market that reduced speculative demand and routed most corporate FX requirements to the official window”.
Nonetheless, the renewed FX supply has helped ease retail demand pressures and compress the premium in the parallel market.
On foreign portfolio investment, analysts cautioned that sustained appreciation of the naira may prompt portfolio rebalancing by offshore investors.
“Nigeria’s carry trade remains one of the most compelling across EM and frontier markets, continuing to attract sizable foreign portfolio inflows. We estimate outstanding FPI positioning at roughly $12.0–$14.0bn.
“Working with the assumption that a significant proportion of the 2025 inflows entered the Nigerian market at a rate of N1,500.00/$, we estimate FX gains of 22.4 per cent on currency alone if the naira strengthens to the midpoint of N1,200.00/$ to N1,250.00/$. Such a gain could potentially increase the risk of foreign portfolio exits, especially considering a likely build-up in uncertainties ahead of the general elections,” said the experts.
Ahead of Monday’s Monetary Policy Committee meeting of the CBN, the analysts said economic signals available to policymakers appeared mixed.
“On one side, inflation is moderating and short-term rates are converging around 22.0 per cent, which is about 500 bps lower than the MPR of 27.0 per cent. On the flipside, the recent body language of the CBN shows low tolerance for liquidity after the governor stated at the National Economic Conference that the liquidity overhang is a major risk to the stability achieved through recent policy reforms.
“So far this year, the CBN has net-issued N10.9 tn through OMO and has left the SDF rate attractive for banks to deposit with the CBN in a bid to avoid liquidity stoking renewed inflationary pressure. The CBN is also concerned about election-related liquidity, which is expected to become more pronounced in the second half of the year. Furthermore, of the total expected liquidity of N44.2 tn in 2026, over 75.0 per cent is expected in the first half of 2026.
It added, “As such, we perceive that the CBN may be inclined towards holding the policy rate constant to signal its concern about liquidity risk while making an adjustment to the asymmetric corridor to align the SDF rate to OMO yields with a view to guarding the attractiveness of OMO and securing banks’ presence as key counterparties to investing FPIs. We see a 60.0 per cent probability of this view panning out and a 40.0 per cent probability of an indicative 50-100 bps rate cut.”
Looking ahead, CardinalStone projected that forward market indicators point to a softer currency path in the months ahead. Six-month non-deliverable forwards suggest a rate around N1,449.96/$ in the early part of the second half of the year, while the firm’s base-case forecast places the naira between N1,350 and N1,450/$ for 2026.
(PUNCH)
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