I made the case that the currency swap regime which the Central Bank of Nigeria executed with its Chinese counterpart will help the Naira rise over the US dollar. Largely, if the pressure on the demand on US dollar drops in Nigeria, the price equilibrium point will move under common sense price elasticity of demand (provided there is no backdoor in the implementation).
It seems my post on the currency swap on Chinese Yuan is generating questions. I had noted that US dollar may fall to the Naira if the pressure on US dollar is disintermediated by direct currency swap on Chinese Yuan. In other words, if Nigerians who import things from China do not have to buy US dollar to pay Chinese merchants in China, the demand for US dollar may marginally drop. If that happens, the exchange rate of US dollar to Naira will drop, assuming common demand and supply mechanics plays out.
Yesterday, I made our service available to a US company coming to invest in Nigeria. One of his biggest uncertainties was (Naira) currency instability. As we discussed, I posited that currency loss risk is not going to be wholly coming from Nigeria. In our model here, we expect the U.S. government to win the tariff battle against China (China has more to lose as it exports more to U.S.).
Simply, under the simple balance of trade and balance of payment, China is more exposed than U.S., bilaterally, and that means it has more risks under this escalating tariff battle. But U.S. will also pay a huge penalty with inflation because I expect China after losing this tariff battle to devalue its currency to make its export cheaper thereby neutralizing the impact of President Trump tariff to American consumers. Tariff is tax, and to reduce the burden to customers, you can decide to absorb the tax if you can. One way China can do that would be to devalue the Yuan, making it cheaper to import from China.
If that happens, U.S. will have to “devalue” its own currency to mitigate that impact [that is for academic analysis]. Sure, America can file a case in the WTO for international trade manipulation. But China may appeal dragging the issue for months. Technically, America cannot just wait for judgment from WTO before taking action. The superpower nation can either make U.S. dollar lose value or increase the tariff on Chinese products to counter the impact of the devalued Yuan.
In a case where U.S. devalues its currency to curtail China’s export imbalance through currency “engineering”, Naira will strengthen against the dollar. I smile…lol!
Join Tekedia Capital and build Next Africa with min of $10,000 in startups.