Traders explain why the exchange rate fell to N745/$1 on the 9th of January 2023

The value of the naira depreciated against the US dollar through the weekend to Monday, closing at N745/$1 compared to the N730/$1, which it closed in the previous week.

Naira had remained stable in the last two weeks, on the backdrop of reduced demand for FX at the black market during the Christmas and New Year festivities. However, the exchange rate has resumed its downturn, trading at its lowest level in almost three weeks.

The downturn in the market has been attributed to the resurgent surge in FX demand, following the resumption of foreign schools and business activities in the country.

According to some black market traders, who spoke to Nairametrics, demand is usually relatively higher at the start of the year due to Nigerians who seek to pay school fees abroad or send monies to their families overseas.

What they are saying: In a phone conversation with Audu, an FX trader at the Lagos International Airport, he explained to Nairametrics, the surge was expected considering the time of the year when parents want to send dollars to their children schooling abroad.

“This time of the year, it is normal for the exchange rate to depreciate because some parents who want to send money to their children in foreign schools will buy dollars, as well as some Nigerians who want to pay their school fees in dollars will also be in need of FX.”

“The rise in demand consequently affects the exchange rate,” he added.
In the same vein, Mr. Muritala who sells dollars at Allen Avenue told Nairametrics that demand has gone up as expected, as it is the beginning of the year, leading to the recent changes in the exchange rate.

Drop in supply at the official market: Data from the official Investors and Exporters window tracked by Nairalytics showed that FX turnover in the market has averaged $65.9 million between 4th and 9th January 2023, compared to a daily average of $159.46 million recorded on December last year.

The massive decline in FX turnover at the official market leaves a supply gap for Nigerians’ FX growing demand, which leaves them with limited options but to patronize the black market.

Meanwhile, the exchange rate has remained stable in the past week at the market, albeit with a depreciation compared to the previous year. Naira has traded at an average of N461.5/$1 at the official window so far in January, while $417.1 million in FX value has exchanged hands in five trading days.

Business and School resumption: As businesses and academic activities take off full swing in January, demand for greenbacks in Nigeria also grew compared to the festive period when some businesses closed for the year, and schools went on break.

Recall that several Nigerians traveled abroad in recent years, most of who were able to migrate through the education route, and would need to fund their school fees.
Some of these students are still being funded by their guardians or parents here in Nigeria, who would require changing their local currency into US dollar, hence higher demand.

What to expect going forward: Responding to the outlook of the naira at the black market, the traded expressed uncertainties concerning the direction of the currency going forward. They explained that the exchange rate is determined by the level of demand and supply, and cannot be projected as there are other fundamentals that need to be considered.

“I really cannot say what the exchange rate will be going forward, not even tomorrow. The rate reacts to the level of demand and supply available in the market as well as regulatory policies, which could come at any time and in any form,” Muritala said.

Meanwhile, the exchange rate at the cryptocurrency peer-to-peer market has also depreciated to a minimum of N745.6/$1 compared to an average of N739/$1 recorded in the last week of December.

In case you missed it: Nairametrics reported last week that the exchange rate between the naira and the US dollar depreciated by 5.7% and 23.1% at the official and black market respectively in 2022.

Naira closed at N735/$1 in 2022 in a dramatic year, which saw the exchange rate surge as high as N900/$1 during the year, while the official rate systematically declined to close the year at N461.5/$1.

The depreciation of the local currency was attributed to some CBN policies, a rise in interest rates, surging demand, etc.

The nation’s foreign reserve also lost $3.43 billion in the same year to constant CBN interventions to defend the currency at the official market.