The exchange rate between the Naira and the Dollar seems to have reached parity following the central bank’s crackdown on Binance, a platform for trading cryptocurrencies.
Research indicates that the exchange rate has averaged N1600/$1 in both the official and parallel markets. Although the rates are not identical, they have fluctuated between N1590 and N1630 in both markets, respectively.
This results in an exchange rate disparity of less than 2%, significantly below the 5% often considered as an acceptable premium between the official and parallel market rates.
This narrow margin has been consistent for about 9 trading days, with a disparity as low as 0.2%. The previous closest period was 8 days, from June 19 to June 30, 2023, with a disparity of 0.3%.
Since Binance discontinued the pairing between the Naira and the stablecoin USDT, foreign currency traders seem to be aligning their quotes with the official market rates.
Findings by Nairametrics also indicate that retail forex traders, such as banks and International Money Transfer Operators (IMTOs), reflect market-determined rates, which are closer to, and in some cases, weaker than the black market rates.
What this means
Analysts at Nairametrics believe that the first step towards achieving price discovery is to ensure exchange rate stability and eliminate volatility.
The initial indicator of this is the narrowing disparity between the official and parallel market rates, as it significantly reduces arbitrage opportunities.
This, in turn, fosters confidence in the market, encouraging foreign investors to begin purchasing Nigerian assets, which also leads to foreign currency inflows and thereby improves liquidity in the forex market.
Moreover, it could signal a slowdown in the rapidly increasing inflation rate, as most goods and services priced in dollars reduce arbitrary price hikes.
The inflow of more affordable imports could also result in lower prices, thereby further aiding in the reduction of inflation.
A recent Goldman Sachs report suggests the exchange rate is currently undervalued and could strengthen to around N1,200/$1 within a year.
– Nairametrics
