CBK continues liquidity mop-up to prop up shilling

The Central Bank of Kenya on Tuesday continued an aggressive mop-up of liquidity in the banking sector in a bid to shore-up the shilling, whose exchange rate remained at a three-year low to the dollar.

Forex traders said the slow trickle of foreign exchange points to further weakening of the currency by end of the week.

Commercial banks quoted the shilling at 89/89.10 units to the dollar in the afternoon, weaker than the Monday closing level of 88.95.

The shilling has been weighed down by demand for dollars to pay for imports, outstripping supply from exports.

Kenya’s biggest sources of foreign exchange include tourism, tea and horticulture, all of which are performing poorer this year compared to their normal levels.

Traders say that if the demand keeps up the shilling could drop to between 89.25 and 89.50 to the dollar in the coming days, now that the psychological level of 89 has been broken.

Forex traders said the shilling’s slide past the 89 level to the dollar could see CBK resort to directly selling dollars to the market in support, going by past practice.

The regulator was in the market again Tuesday to mop up Sh10 billion in excess liquidity, following on from Monday when CBK came in for Sh20 billion.

“The mop up through repos has not reversed the weakening of the currency. The market is cautious given that two weeks ago when the shilling briefly touched the 88.90/89 level in trading we saw direct selling of dollars by the regulator which brought the exchange rate lower,” said Commercial Bank of Africa interbank forex trader John Njenga.

CBK only comes in with direct selling of dollars which has more impact on the exchange rate when the market is highly volatile.

READ: Shilling touches 3-year low to the dollar as forex inflows shrink

The current declining movement is seen by the market as being fundamentals driven, given its gradual nature and resistance to liquidity mop-ups.

The market has been expecting the shilling to weaken, given that banks have been saying in their analysis notes that the shilling’s range by end of year would be between 89 and 90 to the dollar.

The weakening shilling is however not being taken as a negative by some traders, who say it will support the lower interest rate regime the government is pursuing.

I&M Bank head of trading Sheikh Mehran said the lower growth forecast for the economy means that there is greater urgency to pursue lower interest rates to spur growth, and a weaker currency is likely to result from that.

“For the government to attain growth they have to scale up their low interest rate to support lending that in turn spurs growth. A low interest rate regime necessitates a weaker shilling, and you cannot have it both ways with low interest rates and a strong currency,” said Mr Mehran.