LAGOS, Aug 9 – Nigerian naira weakened to 364 per dollar on Friday, from a quote of 363.50 its previous day as falling oil prices worsened liquidity woes on the currency market, traders said.
The dollar shortage was initially caused by a slowdown of foreign inflows after local debt market yields declined.
The naira broke through a resistance level of 363 it has been quoted at since this week as the liquidity pressure worsened, traders said.
Pressure has been building on the naira as oil prices drop and foreign investors book profits on local bonds in response to falling yields. Crude sales account for the bulk of Nigeria’s foreign-exchange earnings and government revenues.
“The (naira) is reacting to external shocks while local (dollar) demand is increasing,” one trader said.
“(Dollar) inflows have slowed, yields have tanked and oil prices are declining.”
The global oil price dropped to $58.69 per barrel on Friday while Nigerian oil suffered the slowest sales of the year in August, traders said, as U.S. exports of competing light, sweet grades flood traditional markets in Europe and Asia.
“The fall in the oil price could have been responsible for Wednesday’s (open market) treasury sale by the central bank. If the currency weakens further, the central bank might intervene,” another trader said.
The central bank held an unscheduled open market auction this week, its first such sale since mid-July as it sought to lure foreign investors to boost dollar liquidity.
It sold the most-liquid one-year bill at 12% owing to excess demand for the notes, lower than the 12.25% it paid at its last auction in July and compared with as high as 18% a year ago.
Nigeria operates a multiple exchange rate regime, which it has used to manage pressure on the currency. The official rate of 306.90 is supported by the central bank but the traded rate of 364 is widely quoted by foreign investors and exporters
Falling Oil prices threatens Nigeria’s 2019 budget implementation
An investigation by Naija247news showed that the situation is fueled by a combination of factors, including excess supply, dwindling demand, and fears of economic recession, arising from an increasing wave in interest rate cuts around the world.
At the current price, the nation, which had based its 2019 budget on $60.00 and 2.3 million barrels per day, BPD this year, has suffered a setback of $2.79 per barrel.
Besides Bonny Light, the prices of Brent and the Organisation of Petroleum Exporting Countries (OPEC) Basket also dropped from $59.19 and $60.54 to $57.71 and $59.71 per barrel, respectively.
In a report obtained by Vanguard, a market analyst, Mr Nick Cunningham, who has been closely monitoring the situation stated: “Crude oil has plunged by, even more, falling by more than 13 per cent in the first week of August. In fact, oil is down by more than 20 percent since a recent peak in April, which puts it into the bear market territory.
“Oil is suffering from its own set of unique problems, with weak demand lagging behind large increases in supply. A surprise build in crude inventories on Wednesday from the EIA led to steeper fall in oil prices, which were already reeling. “There is also a direct effect of the currency battle on oil demand.
A stronger dollar makes oil more expensive to the rest of the world. That has an immediate pricing impact on consumers, which is why oil tends to move inversely to the dollar. “However, demand is also slowing because of the broader economic problems – the trade war and the deteriorating global economi