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BusinessNaira strengthens as Central Bank offloads dollars amidst liquidity worries

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Naira strengthens as Central Bank offloads dollars amidst liquidity worries

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The naira surged to its strongest level in over a month as Nigeria’s central bank intervened in the foreign exchange market by selling dollars.

On Monday, the naira strengthened by 9.7% to reach 1,339.33 per dollar, marking its highest level since April 26 and recording its most significant one-day increase since mid-January.

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However, it retreated above 1,400 per dollar in intra-day trading on Tuesday, as reported by two traders in Lagos via the currency platform operated by the FMDQ Exchange.

According to two individuals familiar with the situation, authorities intervened on both Monday and Tuesday. The central bank has yet to respond to requests for comment.

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“The central bank dollar sales and OMO auction” helped to strengthen the naira, said Olaolu Boboye, an analyst at asset manager CardinalStone in Lagos, referring to the central bank’s open market operations.

On Friday, there was a significant increase in dollar liquidity after the central bank auctioned one-year treasury bills, attracting substantial inflows.

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The auction, which amounted to 1.143 trillion naira ($800 million) worth of bills at a yield of 22.49%, more than doubled liquidity in the foreign exchange market to $556 million. However, this surge in liquidity did not persist into Monday, as the volume of dollars sold in the market declined to $181 million despite central bank interventions.

Samir Gadio, head of Africa strategy at Standard Chartered Bank, stated that the central bank is currently selling dollars at rates ranging from 1,260 to 1,320 per dollar, which is significantly lower than the current exchange rate of below 1,400. These sales are occurring in anticipation of the maturity of a $1.3 billion naira futures contract scheduled for Wednesday.

“The rationale may be to contain and pre-empt a potential increase in dollar demand in the coming days,” Gadio said. It is also “conceivable” that there could be another bill sale to offset the impact of the expiring contract, he said.

Since mid-April, the naira has experienced significant volatility, undoing much of the progress it made in March due to increased dollar inflows. It has emerged as one of the weakest currencies tracked by Bloomberg over the past month, despite being the strongest performer in March.

Last week, the central bank hiked its benchmark interest rate to a record high of 26.25% in an effort to lure dollar inflows and combat inflation, which surged in April to a 28-year peak of 33.7%.

“The Nigerian naira’s dizzying swings — sharpest among liquid currencies globally since the start of the year — are driven by capital flows and may persist at least until inflation peaks, likely in the coming months,” Bloomberg Intelligence analyst Sergei Voloboev said in a note last week.

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