Naira appreciates to N1,337 per dollar as foreign exchange turnover collapses 49 percent

The naira strengthened to N1,337 per dollar on Friday, extending its recovery streak as weekly forex turnover plummeted to $2.71 billion. The sharp decline in trading activity raises questions about market depth and the sustainability of the currency's gains.

Nigeria's naira extended its appreciation streak to N1,337 per dollar on Friday, marking continued recovery from earlier weakness, even as foreign exchange turnover collapsed to $2.71 billion, down 49 percent week-on-week. The divergence between currency strength and drastically reduced trading volumes signals a thinning market with limited liquidity, presenting both opportunities and risks for businesses and consumers.

The naira's strengthening reflects improved dollar inflows from crude oil sales and portfolio investments returning to Nigerian assets. Oil prices have stabilized above $80 per barrel in recent weeks, bolstering Nigeria's primary source of foreign currency. The Central Bank of Nigeria's forex interventions through various windows have also supported the local currency, helping arrest the depreciation that accelerated earlier in the year. At N1,337 per dollar, the naira has recovered approximately 8 percent from its worst levels near N1,450 recorded in September.

However, the precipitous fall in trading turnover paints a different picture beneath the surface. Weekly forex turnover dropping to $2.71 billion represents a concerning contraction in market activity. This suggests traders are becoming more cautious, possibly waiting for clearer directional signals before committing capital. Reduced turnover typically indicates lower market liquidity, making it harder for large transactions to execute without moving prices significantly. For multinational corporations with substantial forex needs and small businesses dependent on imports, thinner liquidity means wider bid-ask spreads and potentially worse exchange rates when converting currencies.

The divergence between price strength and volume weakness is a classic warning sign in financial markets. A currency can appear strong on thin volume, only to reverse sharply when genuine selling pressure emerges or dollar supply dries up unexpectedly. Nigeria's forex market has been vulnerable to such reversals before. In 2023, sudden dollar shortages triggered rapid naira depreciation despite periodic Central Bank interventions. The current situation, while showing the naira stronger, warrants vigilance about the underlying health of the market.

For Nigerian businesses and consumers, the current environment presents mixed signals. The stronger naira reduces import costs for businesses reliant on foreign goods and raw materials, providing some relief from inflation pressures that have persisted through 2024. A manufacturer importing machinery or a pharmaceutical company importing active ingredients benefits from better exchange rates. However, businesses exporting goods face headwinds. Nigerian exporters outside oil receive less naira for their foreign currency earnings, compressing margins. The reduced trading volume also means businesses seeking to hedge currency risks may struggle to access sufficient forex at reasonable prices.

Retail consumers face limited immediate benefit from naira strength. While importers may eventually pass some savings to consumers through lower prices, this transmission typically lags significantly. Nigerians buying goods priced in dollars still encounter elevated prices relative to pre-2020 levels. Those sending money through official channels benefit from better rates, though the volume of such transactions remains constrained by limited dollar availability in the informal market.

The Central Bank faces a balancing act. Supporting the naira maintains import purchasing power and anchors inflation expectations, both positive for monetary policy objectives. Yet the sharp decline in turnover suggests the banking system may not have sufficient organic dollar supply to meet demand at current exchange rates. If the CBN maintains support through direct interventions without corresponding improvements in underlying dollar flows, reserves could deplete, eventually forcing another depreciation cycle.

Market analysts expect the naira trajectory to depend heavily on oil price movements and the Federal Reserve's monetary policy path. As the U.S. Federal Reserve maintains higher-for-longer interest rates, capital flows from emerging markets to developed economies remain attractive. This structural headwind will continue pressuring the naira unless Nigeria's macro story improves substantially. The government's fiscal consolidation efforts and ongoing business environment reforms help, but their impact remains modest against global factors.

The coming weeks will reveal whether current naira strength represents genuine recovery or a temporary respite. Sustained improvement requires increased dollar inflows from both oil revenues and foreign investments. Without these genuine sources of supply, reduced trading volumes may simply precede another sharp depreciation when market confidence deteriorates. Nigerian businesses should monitor both price and volume trends carefully before making major forex-dependent decisions.