JP Morgan, a multinational financial services firm, predicts that the Nigerian naira will appreciate and trade at around N600 to the dollar in the upcoming months, according to a statement released on Thursday.
The projection comes after the Central Bank of Nigeria announced the unification of all segments of the foreign exchange (FX) market, indicating that the exchange rate will now be determined by market forces.
This new policy by the central bank follows President Bolu Tinubu’s call for a unified exchange rate, stating that the “monetary policy needs thorough house cleaning.”
During trading hours on Wednesday, the naira was reported to have traded between N750 and N755 per dollar before appreciating to close at N664.04.
JP Morgan analyzed the naira float and expects an initial overshoot towards the parallel market rate of below 750 or higher, before stabilizing in the high 600s over the coming months.
The financial institution maintains a positive stance on the USD/NGN exchange rate, holding non-deliverable forwards (NDFs) and an overweight position in the emerging markets bond index global diversified (EMBIGD) index. It anticipates further positive catalysts and progress in reforms in the near term.
In another development, President Bola Tinubu announced the cessation of petrol subsidy payments during his inaugural speech on May 29. The Nigerian National Petroleum Company (NNPC) Limited promptly adjusted the pump price across its retail outlets nationwide.
JP Morgan warns that the surge in petrol prices may result in a rise in headline inflation from 22.41 percent in May 2023 to around 25 percent in June 2023.
While the removal of fuel subsidies is expected to have a positive impact on the fiscal accounts, the bank suggests that a weaker exchange rate could lead to higher naira revenues from oil and gas exports.
JP Morgan believes that the devaluation of the naira will have a limited impact on headline inflation, considering that a significant portion of the informal economy accessed dollars at the higher parallel market rate.
The financial institution acknowledges that the new policies on FX and petrol prices may require further adjustments once a cabinet is announced, but it remains optimistic about the potential for more reform execution surprises in the near term.
