The naira looks set for fresh stability after a sharp fall in the value of the dollar, which followed the Democratic Party’s win of both chambers of the United States Congress in the recent midterm elections.
The political shift in Washington is also filtering through to global foreign exchange markets.
Overseas investors are repositioning their assets to reflect expected changes in fiscal policy and possible interest rate hikes by the US Federal Reserve, which is putting downward pressure on the Greenback.
Democrats won victories in Republican districts and red states across the country.
They flipped at least six Senate seats and won House races in districts that, just a few years ago, would have been more likely to vote Republican in 2024.
Some news outlets projected a Democratic win in the House, while Decision Desk HQ projected that the party had secured the Senate.
President Trump said he could “get along with a House and Senate that are controlled by the opposite party” if they were willing to work with him.
A Democratic wave is seen as negative for the US dollar, on expectations of tighter government regulation, especially of big-growth technology and artificial intelligence companies.
US Treasuries could rally if gridlock blocks further tax and government spending cuts, easing concerns about the level of federal borrowing.
A Democrat-controlled Congress also adds gridlock to major deregulation and unilateral tax cuts, further dampening enthusiasm for aggressive US fiscal expansion.
Such a scenario tends to trigger a correction or weakness in the US Dollar Index (DXY).
Technically, a softer dollar allows the pair to push into key support levels without necessarily breaking through resistance levels.
The pair could move closer to its lower bound, nudging back toward ₦1,300/$ to ₦1,250/$.
The attractive Central Bank of Nigeria (CBN) monetary policy rate, which is above 20 per cent, draws international portfolio investors, who, amid growing uncertainty over treasury yields from Washington, chase higher-yielding emerging and frontier market debt in what is known as the carry trade.
Higher foreign portfolio investment into Nigerian OMO bills and sovereign debt supports the naira by increasing dollar liquidity in the Nigerian Autonomous Foreign Exchange Market (NAFEM).
The dollar’s broad slide gives the CBN some room to manoeuvre.
The apex bank is likely to be in a much better position to defend the naira and stabilise the exchange rate in the near to medium term, given the resilience of Nigeria’s external reserves and oil revenue.
Traders will be watching releases from the U.S. Federal Reserve and the CBN’s Monetary Policy Committee (MPC) for clues on the direction of the rate in the near and distant future.
The geopolitical risk premium also remains a consideration, despite the push for a diplomatic end to the US-Iran war, which has raged for eight months.
President Trump said on Tuesday in an interview with the Financial Times that the US had no plans to attack Iran in the near term, even though Israeli Prime Minister Benjamin Netanyahu had declared plans for an attack later this week.
A senior Iranian official told Reuters that the Strait of Hormuz would be reopened if US sanctions were waived and the naval blockade lifted.
Iran’s Islamic Revolutionary Guard Corps (IRGC) announced that four tankers were destroyed after hitting mines south of the Strait of Hormuz.
This adds to fears of oil supply risk and inflationary pressure from volatile energy markets, which supports further tightening of Fed policy.
On Wednesday, traders will get this week’s US economic calendar, including the US ADP report on private sector employment and the ISM Services PMI.
Incoming geopolitical news may drive some additional momentum to gold, but the downside could be limited, as markets will be watching the key US monthly employment figures, the Nonfarm Payrolls, on Friday.
