Nigeria's currency ended May with one of its strongest showings in months, as the gap between the official and parallel foreign exchange markets narrowed significantly, signaling improved stability in the country's currency market.
At the official foreign exchange market, the naira appreciated by 0.16 percent during the week to close at N1,373.25 per dollar. In the parallel market, often referred to as the black market, the currency weakened slightly to around N1,372 per dollar, leaving both segments nearly aligned.
Rising Reserves Support the Naira
The naira's resilience was supported by continued growth in Nigeria's external reserves, which rose by 0.57 percent to $49.26 billion. Analysts noted that while foreign exchange demand and liquidity pressures remain challenges, the increase in reserves has helped provide a buffer against volatility and strengthened market confidence.
Last week's trading activity suggested that the gradual convergence of the official and parallel markets is becoming more entrenched, reducing opportunities for arbitrage and speculation.
Oil Price Weakness Remains a Concern
Despite the naira's gains, developments in the global oil market continue to pose risks. Brent crude, Nigeria's benchmark oil grade, retreated during the week, falling from around $93.84 per barrel to $92.08, while West Texas Intermediate (WTI) dropped to $87.55 per barrel.
Market analysts attributed the decline to profit-taking and adjustments following April's rally, which had been fueled by supply disruptions. While stronger reserves are expected to support the naira in the near term, experts warn that sustained pressure on oil prices could affect Nigeria's foreign exchange earnings over time.
Liquidity Surges Across Financial Markets
Nigeria's money market remained awash with liquidity throughout the week. System liquidity climbed from N3.84 trillion at the start of the week to N6.02 trillion by Friday, driven largely by a N1.97 trillion maturity of Open Market Operations (OMO) instruments and increased placements at the Central Bank's Standing Deposit Facility.
Despite the liquidity surge, interbank lending rates remained stable, reflecting comfortable funding conditions within the banking system. Investor appetite also remained strong in the fixed-income market. At the Central Bank's May 29 OMO auction, the 102-day instrument attracted subscriptions worth N1.73 trillion against an offer size of N200 billion, highlighting robust demand for short-term government securities.
Outlook for June
Analysts expect liquidity conditions to remain strong in June, supported by anticipated inflows of approximately N3.35 trillion from the maturity of OMO and Treasury Bill instruments. While foreign exchange demand and dollar liquidity constraints may continue to create occasional pressure, the near convergence of official and parallel market rates, coupled with rising reserves, offers a positive signal for the naira as the new month begins.
