Nigeria's naira rose to a five-week high against the dollar in intraday trading on Wednesday, a day after the central bank hiked interest rates to tame inflation and lifted restrictions on foreign investors participating in its fixed-income auctions. The currency rose to 1,200 per dollar on the official market, LSEG data showed, strengthening above the parallel market levels at about 1,340.
Africa's largest economy has been grappling with dollar shortages that pushed its currency to a record low of 1,851 per dollar last month, though central bank Governor Olayemi Cardoso has said that dollar liquidity is improving.
Last week, Nigeria's central bank said it had cleared all of its verified foreign exchange backlog, part of its strategy to stabilise the naira and tame soaring inflation.
The central bank on Tuesday raised its monetary policy rate 200 basis points to 24.75% from 22.75% (NGCBIR=ECI), a month after its largest hike in around 17 years. The central bank paid 26.6% for the one-year Treasury bill at its last auction two weeks ago, but investors at Wednesday's auction expect yields to rise above secondary market quotes of around 22.75% for the one-year bill and around 20.6% for the benchmark 10-year note.
Goldman Sachs analysts Andrew Matheny and Bojosi Morule said the central bank's further rate hike and "the emphasis on improving monetary transmission mechanism by mopping up liquidity will help to rebuild policy credibility", boosting Treasury bill yields to about 28% to 29%. In the past, lenders faced constraints in fulfilling foreign investors' bids as they incurred extra costs on settlement day if they borrowed from the central bank's discount window to pay for bills. Foreign investors can now pre-fund their accounts and get naira at the prevailing exchange rate for the auctions, analysts said. "With this policy mix and with more inflows likely, including a Eurobond, we remain constructive on the naira, with our forex strategists forecasting an appreciation to 1,200 versus the dollar over the next 12 months," Matheny and Morule wrote in a research note to clients on Wednesday.
The central bank hopes the auctions can attract sufficient foreign interest to boost dollar liquidity. Tellimer economist Patrick Curran said that "while forex liquidity has improved, it is still well below pre-pandemic levels and a boost in dollar supply will be needed to support further naira appreciation."