Nigeria’s foreign exchange market has seen the turnover on the Nigerian Autonomous Foreign Exchange Market (NAFEM) window surge by an astonishing 231.99% on May 24, 2024. This development coincides with the Central Bank of Nigeria (CBN) successfully raising N1.16 trillion through its Open Market Operation (OMO) bill auction on Friday, aimed at mopping up excess liquidity in the financial system.
Data obtained from FMDQ shows that the naira appreciated slightly against the dollar on the NAFEM window, closing at N1482.81/$1, reflecting a 0.19% increase from the previous day’s rate of N1485.66/$1.
This marginal appreciation comes after the naira snapped its four-day winning streak, depreciating by 1.55% to close at 1485.66/$1 on the official market on Thursday.
The surge in FX turnover to $556.25 million from the previous day’s $167.55 million represents a remarkable 231.99% increase, underscoring the heightened activity and investor participation in the market.
Market Dynamics
The dramatic increase in FX turnover is likely attributed to the CBN’s aggressive liquidity management strategy, which saw the apex bank raise a substantial N1.16 trillion from the OMO bill auction. This move forms part of the CBN’s efforts to control inflationary pressures and stabilize the naira amidst ongoing economic challenges.
On May 23, 2024, the naira experienced a slight depreciation of 1.55%, closing at N1485.66. However, the market responded positively to the CBN’s intervention, resulting in a modest appreciation of 0.19% the following day.
The significant increase in FX turnover suggests a surge in dollar supply, likely driven by the proceeds from the OMO auction, which bolstered investor confidence and market liquidity.
The surge in FX turnover comes barely three days after the 295th meeting of the Monetary Policy Committee (MPC) of the CBN. The CBN increased the monetary policy rate (MPR) by 150 basis points, to a new unprecedented 26.25%.
This is a lower hike compared to the 200 basis points at 24.75% after the previous meeting. The decision announced by the CBN governor, Yemi Cardoso, propels the MPR to its highest point ever, reaffirming the CBN’s aggressive stance on monetary tightening in response to inflationary pressures. The policy rate was raised to curb inflation and attract foreign investment, theoretically supporting the Naira.
Also, the CBN offered a total of N508.98 billion during the Nigerian treasury bill (NTB) auction held on May 22, 2024, with subscription levels significantly surpassing the initial offer, highlighting the continued appetite for fixed-income securities amidst a volatile economic landscape.
Despite the oversubscription of N1.5 trillion, only about N638.98 billion was allotted to the treasury bill investors. The heightened interest in treasury bills can be attributed to the recent increase in the MPR, which has made government securities more attractive to yield-seeking investors.
Implications for the Economy
The substantial increase in FX turnover and the successful OMO auction are pivotal in the CBN’s broader strategy to maintain price stability and support economic growth.
By mopping up excess liquidity, the CBN aims to curb inflation, which has been a major concern for policymakers. The raised N1.16 trillion will help mitigate inflationary pressures by reducing the amount of money in circulation, thereby supporting the naira.
Moreover, the increased FX turnover indicates robust market activity and investor confidence, which are essential for a healthy foreign exchange market. This heightened activity is likely to have positive ripple effects on various sectors of the economy, particularly those dependent on foreign exchange for imports and other transactions.