The safe-haven currency rose on Monday as violence in the Middle East rattled markets, while a booming US jobs report gave the greenback fresh impetus against the naira.
Naira’s Exchange Rate in Focus
The naira was trading at N1008/$ in the p2p market early on Monday as traders re-examined the forex market situation amid the ongoing crisis in the Middle East.
The naira closed at N770.41/$ on Friday at the official market.
Fitch Ratings stated that the growing gap between the official exchange rate and the parallel exchange rate of the Nigerian naira indicates the country’s lack of ability to stabilize the currency and the possibility of further depreciation.
The sense of risk dried up in financial markets after Israeli forces clashed this weekend with gunmen from the Palestinian group Hamas, hours after the militants launched a surprise attack on Israel in a bloody day of violence.
Escalation of Middle East Conflict
The death toll from fighting in the Middle East over the past two days has exceeded 1,100 dead and thousands injured on both sides. Palestinian militant groups claim to hold more than 130 prisoners on the Israeli side.
Israel’s declaration of war raises questions about whether it will launch a ground attack on Gaza, which in the past has resulted in heavy casualties.
US Secretary of Defense Lloyd Austin has ordered the Ford Carrier Strike Group to the Eastern Mediterranean to stand ready to support Israel, to help prevent any regional expansion of the conflict.
US Dollar Outlook and Monetary Policy
The dollar index rose 0.2% to 106.21, getting further support from data on Friday that showed U.S. jobs rose by the most in eight months in September, paving the way for higher-than-expected inflation.
The monthly chart suggests there is room for a push further north towards the 109.3 resistance level, following a rebound from 99.7 support in July.
On the upside, the daily chart highlights a technical point towards resistance at 107.6, with support nearby at 105.76, which should probably be watched closely this week.
Market prices suggest there is an 82% chance the Federal Reserve will leave interest rates unchanged at its November policy meeting.
Federal Reserve Governor Michelle Bowman reiterated her view Saturday that inflation continues to be too high despite “significant” progress in reducing inflation and the U.S. central bank Ky may need to tighten monetary policy further.
- “I think it would probably be appropriate for (the Fed) to raise interest rates further and keep them restrained for a while to get inflation back to our 2% target promptly,” Bowman said.
- “We should continue to be prepared to increase the federal funds rate at the next meeting if data suggests inflation isn’t progressing at a 2% rate,” she said.
Monetary policy divergence remains beneficial for the US dollar. Risk aversion will also boost demand for the US dollar.
However, FOMC members may narrow the gap ahead of US inflation figures on Wednesday and Thursday.