The Nigerian naira strengthened as the U.S. dollar index edged lower ahead of the U.S. CPI data and the televised U.S. presidential debate.
The local currency began the week on an upswing against the U.S. dollar at the official market.
NAFEM data showed the naira strengthened to N1,580/$1 on Monday, which was N13 lower than the N1,593/$1 traded at the official window at the end of the previous week.
The Central Bank of Nigeria (CBN) resumed selling U.S. dollars to local FX dealers to counteract the naira’s declining value. This action followed the naira-dollar exchange rate crossing the N1600 support line, likely due to rising demand for U.S. dollars for business, travel, foreign tuition, and imports.
The apex bank has established guidelines for registered forex change dealers, including a 1 percent markup on the purchase price and specific locations for application submission.
U.S. Dollar Index Slows Down Ahead of Key Economic Data
The Federal Reserve’s decision to cut rates by 25 basis points (bps) as planned or by a more substantial 50 bps at its September meeting remained unclear following a mixed labor report released on Friday.
The dollar index, which gauges the U.S. currency’s strength against six major currencies, was slightly down by 7 basis points at the time of this report, trading around 101 index points. Data from the CME FedWatch tool highlighted that market participants have fully priced in a 25-basis point cut for next week, with a 50-basis point cut priced in at 30 percent, down from as high as 50 percent on Friday.
The U.S. dollar index’s price action shows movement toward the 20-day Simple Moving Average (SMA) stationed at 101.6 index points, though it remains negative. The short-term outlook is improving, and a buying opportunity is indicated by a breakout above this level. Currency traders are positioning themselves ahead of Wednesday’s U.S. Consumer Price Index (CPI) report. According to market strategists, the greenback typically declines before Fed easing cycles and tends to overestimate rate cuts during soft landings. However, they contend that we are likely at the end of this trend.
Investor attention will also be focused on Tuesday’s eagerly awaited televised U.S. presidential debate, which could significantly impact the market. If Donald Trump wins, traders anticipate that the dollar will appreciate due to tariffs supporting the currency value and higher government spending potentially raising interest rates.
UBS, a Tier 1 Swiss bank, recently adopted a more bearish view of the greenback over the medium term, advising investors to sell any potential short-term gains in the currency. The multinational bank forecasts a potential correction in September, especially if the Fed’s reluctance to lower interest rates by more than 25 basis points coincides with the U.S. dollar’s seasonal upward trend this month.
Traders anticipate 110 basis points of easing in 2024, up from roughly 100 basis points in the three remaining meetings. Governor Christopher Waller stated that he might support consecutive rate cuts or larger cuts if the data indicates they are necessary, as Fed policymakers indicated last week that they are prepared to begin a series of rate cuts.
