Deutsche Bank Adds Nigeria to Forex Watchlist, Sees Further Naira Gains

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The German multinational bank said Nigeria’s relatively high real interest rates and improving external position could support the naira’s outlook, strengthening the appeal of local currency assets to carry trade investors seeking to profit from interest rate differentials between currencies.

However, the lender warned that rising government borrowing and fiscal pressures could threaten the currency’s positive performance, particularly as the country approaches its January elections.

According to Bloomberg, strategists and economists at the Frankfurt based bank consider the naira undervalued, with favourable real interest rates providing attractive opportunities for investors willing to take positions in the currency.

According to data by the Central Bank of Nigeria (CBN), the value of the naira had appreciated by 0.45 per cent against the dollar in September, strengthening from N1,335.50 per dollar at the end of August to N1,329.50 per dollar at the end of September.

The currency consequently gained N6 against the dollar during the month, extending its positive performance amid improving foreign exchange conditions and renewed interest in Nigerian financial assets.

The naira’s performance has also contributed to returns on local currency investments, including equities and domestic bonds, which have delivered some of the strongest returns globally.

Deutsche Bank, however, identified fiscal developments as a major threat to the sustainability of the currency’s gains. “The principal risk to the outlook is from the fiscal side,” the bank said on Monday, pointing to the Debt Management Office’s bond issuance calendar for the quarter, which signals “elevated issuance levels.”

The lender expects government spending to increase ahead of Nigeria’s January elections, potentially putting pressure on fiscal balances and the domestic financial market.

Nevertheless, the bank sees less risk arising directly from the elections themselves, suggesting that fiscal policy and borrowing requirements could prove more significant to the naira’s outlook than the political transition.

The inclusion of Nigeria in the bank’s frontier foreign exchange monitor is an indication of the growing attention international investors are paying to the naira and the returns available from Nigerian assets.

The monitor also tracks other African currencies, including Angola’s kwanza and Ghana’s cedi, which the bank said have performed well this year despite the economic consequences of the conflict in the Middle East.

Higher crude oil prices have supported the external positions of Nigeria and Angola, while firmer gold prices have benefited Ghana. These commodity price movements have helped strengthen the current account positions of the three economies.

The countries have also benefited from relatively high real interest rates and substantial foreign exchange reserves, factors that have helped attract foreign capital inflows. For Nigeria, higher oil prices can support foreign exchange supply through export earnings, while elevated domestic interest rates can make naira denominated investments more attractive to foreign portfolio investors seeking competitive returns.

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