No respite for naira as US dollar, yields hit record levels

AFRICAN STOCKS AND FINANCEOctober 4, 2023 at 11:29 AM UTC

Yemi Cardoso, the new chief of the Central Bank of Nigeria (CBN), is facing a new challenge as the U.S. dollar creates fresh concerns for the Nigerian foreign exchange market. Despite the CBN's efforts to stabilize the Nigerian naira, the market is becoming increasingly vulnerable.

On Monday, the U.S. dollar, as measured by the DXY index, surged, surpassing 106.80 and reaching its highest level since November 2022. This uptick in the dollar's strength has been driven by the rising US Treasury yields, with US 10- to 30-year bonds climbing to new cycle highs. Global bond markets have been experiencing a downward trend, and U.S. Treasury yields reached a 16-year high on Monday, following a brief pause late last week. The benchmark 10-year Treasury yield rose by 0.13 percentage points to reach 4.70%, a level not seen since 2007. This increase in yields came after better-than-expected manufacturing data, which boosted investor confidence.

These developments are posing new challenges for Cardoso and the CBN in their efforts to maintain stability in the Nigerian foreign exchange market amidst a strengthening U.S. dollar and global bond market dynamics.

Key Takeaways

In recent weeks, bond prices worldwide have experienced significant declines. This trend can be attributed to a combination of factors, including a series of Treasury issuances by the U.S. government and a growing sentiment among investors that central banks will maintain high interest rates for an extended period. It's important to note that bond yields move inversely to bond prices, so when prices fall, yields rise. Despite efforts to stabilize it, the Nigerian naira is still trading above N1,000 against the U.S. dollar in the black market. This has resulted in an increase in the prices of consumer goods that are traded in foreign currencies. Nigeria's economy heavily relies on imported goods, making it particularly sensitive to currency fluctuations. Traders in Nigeria's parallel market have noted that the country's central bank has not intervened significantly in recent weeks, leaving businesses and individuals to resort to the black market for their foreign currency needs. Nigeria continues to face a chronic shortage of foreign exchange.