Nigeria’s naira could strengthen further against the US dollar, with Deutsche Bank identifying the currency as undervalued and adding the country to its frontier foreign exchange monitor.

The German lender said attractive interest-rate returns and favourable real interest rates were supporting the outlook for the naira, although rising government borrowing remained a major risk to sustained appreciation.

According to Bloomberg, the bank outlined its position in a client note on Monday, highlighting Nigeria’s improving currency performance and the potential returns available to investors holding naira-denominated assets.

The naira has appreciated by nearly eight per cent against the dollar in 2026, placing it among the 10 best-performing currencies out of 144 tracked by Bloomberg.

The gains have also boosted returns on Nigerian equities and local-currency bonds, which have ranked among the strongest-performing assets globally.

However, Deutsche Bank cautioned that fiscal pressures could undermine the currency’s positive trajectory, particularly as the government prepares for increased spending ahead of the January elections.

“The principal risk to the outlook is from the fiscal side,” the bank said.

It pointed to the Debt Management Office’s bond issuance calendar for the fourth quarter, which indicates elevated borrowing levels.

Higher government borrowing could increase pressure on domestic financial markets and complicate efforts to sustain the conditions supporting the naira’s recent gains.

Deutsche Bank expects government spending to rise ahead of the elections but sees less risk arising directly from the electoral process itself.

The bank’s assessment places Nigeria alongside Angola and Ghana in its frontier foreign exchange monitor, which tracks currencies in markets where investors seek opportunities from interest-rate differentials and potential exchange-rate movements.

According to the report, higher crude oil prices have supported the current-account positions of Nigeria and Angola, while stronger gold prices have benefited Ghana.

High real interest rates and substantial foreign exchange reserves have also helped attract investment into the three economies.

These factors have provided support for the naira by strengthening external balances and making local-currency investments more attractive to foreign investors.

The currency’s performance is significant for investors because appreciation against the dollar can increase the value of naira-denominated investments when converted into foreign currency, provided the gains are not offset by other costs or market movements.

The outlook however remains exposed to changes in government borrowing, foreign exchange demand and global commodity prices.

Deutsche Bank’s positive assessment signals confidence in the naira’s prospects, but the lender’s warning over fiscal risks highlights the importance of government financing decisions in determining whether the currency can extend its gains.