Naira Strengthens Sharply as CardinalStone cites improved FX liquidity but warns of potential foreign investor exits later this year

The naira strengthened sharply in recent weeks, reaching one of its strongest levels in nearly two years, as CardinalStone Partners Limited projected improved liquidity but warned of potential foreign investor exits, in a macroeconomic update released in Lagos on Monday.

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The report said the naira appreciated by 6.9 per cent year to date in the official market, closing at 1,347.78 dollars on Monday.

CardinalStone stated that the rally reflects stronger liquidity conditions in the official foreign exchange window.

Despite the gains, the spread between the official and parallel markets persisted.

The parallel market initially traded at a 5.7 per cent premium before narrowing to about 3.2 per cent after renewed foreign exchange interventions by the Central Bank of Nigeria.

CardinalStone said the narrowing premium indicates stronger liquidity in the official window than in the parallel market.

Last week, the Central Bank of Nigeria permitted licensed Bureau de Change operators to access foreign exchange through authorised dealers at prevailing market rates.

The apex bank set a weekly purchase limit of 150,000 dollars per BDC, subject to know your customer requirements.

The regulator also directed BDCs to sell unused balances within 24 hours to prevent hoarding.

Cash transactions were capped at 25 per cent of total FX trades, with settlements required through licensed financial institutions.

CardinalStone estimated that with 82 licensed BDCs, potential monthly supply to the segment could reach about 50 million dollars.

The figure remains significantly below the more than 1 billion dollars supplied monthly before the COVID-19 pandemic.

The analysts said the disparity reflects material improvements in the FX market, which have reduced speculative demand and channelled most corporate FX requirements to the official window.

Renewed supply has eased retail pressure and compressed the parallel market premium.

On foreign portfolio investment, CardinalStone cautioned that sustained currency gains could trigger portfolio rebalancing by offshore investors.

The firm described Nigeria’s carry trade as one of the most compelling across emerging and frontier markets.

It estimated outstanding foreign portfolio positioning at between 12 billion and 14 billion dollars.

Working on the assumption that many 2025 inflows entered at around 1,500 naira to the dollar, the analysts projected potential FX gains of 22.4 per cent if the currency strengthens towards a midpoint of 1,200 to 1,250 naira per dollar.

Such gains, CardinalStone warned, could heighten the risk of foreign portfolio exits, particularly amid expected uncertainties ahead of the general elections.

Ahead of the Monetary Policy Committee meeting of the Central Bank of Nigeria scheduled for Monday, the firm said policy signals remain mixed.

Inflation is moderating and short term rates are converging around 22 per cent, roughly 500 basis points below the Monetary Policy Rate of 27 per cent.

However, the central bank governor recently signalled low tolerance for excess liquidity, describing liquidity overhang as a major risk to recent policy stability.

So far this year, the apex bank has net issued 10.9 trillion naira through Open Market Operations and maintained an attractive Standing Deposit Facility rate to draw liquidity from banks.

The bank is also monitoring election related liquidity, which analysts expect to intensify in the second half of the year.

CardinalStone said it sees a 60 per cent probability that the committee will hold the policy rate to signal concern over liquidity risks, while adjusting the asymmetric corridor to align the SDF rate with OMO yields.

The firm assigns a 40 per cent probability to a modest 50 to 100 basis points rate cut.

Looking ahead, forward market pricing suggests a weaker currency later in the year.

Six month non deliverable forwards indicate a rate near 1,449.96 naira to the dollar in the early second half.

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CardinalStone projects a base case range of 1,350 to 1,450 naira per dollar for 2026.