CBK defends its support for the weakening shilling

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The shilling opened trading at an average of 87.15 units to the dollar, before weakening to about 87.25, according to dealers at ABC Bank.
Dealers said that they expect the increased demand for dollars that comes during end of the month to weaken the shilling.
On Friday, CBK said in a statement its interventions in the market were only meant to stem volatility, but not control the exchange rate.

Heavy demand for dollars from oil importers and manufacturers put the shilling under pressure in Monday’s trading, even as the Central Bank of Kenya (CBK) sought to assure the market that it was committed to a free-floating currency.

The shilling opened trading at an average of 87.15 units to the dollar, before weakening to about 87.25, according to dealers at ABC Bank.

Last week, it closed at between 86.80 units and 87.30 to the dollar, having strengthened slightly after banks unwound their dollar positions before the weekend. A day before, it traded at the 87.155 units to the dollar.

Dealers said that they expect the increased demand for dollars that comes during end of the month to weaken the shilling.

“There’s increasing demand (for dollars) from manufacturers and oil importers,” said Joel Mbuvi, the head of Treasury at ABC Bank, adding that “end-month pressures” were weighing on the currency.

On Friday, CBK said in a statement its interventions in the market were only meant to stem volatility, but not control the exchange rate.

“We wish to reiterate that the Bank believes in allowing the market to determine the trading level of the local currency and only intervenes when there is excess volatility that prevents the market from functioning efficiently.”

Last week, the regulator intervened twice in the currency market, helping to prop up the shilling which had touched the 88 units exchange rate.

A weak shilling hurts the economy by making imports more expensive, while a strong shilling eats into exporters’ earnings by reducing the amount of shillings they get per unit of sale in the international markets.

The regulator added that its open market operations through sale of dollars or injection of shillings was only meant to stabilise the currency in the short-term.

“Therefore, the Bank does not support a particular level or direction of the currency and only intervenes to enhance stability and the planning horizon for the market participants.”

Analysts said that the instability in Egypt was to blame due to the contagion effects it had on oil prices.

“The weakening was attributed to high demand from importers on uncertainty in Egypt which has seen a significant increase in oil prices to about $108 a barrel for the Brent oil,” said a weekly report by Sterling Capital.

Should trouble in the country continue, it could put more pressure on the shilling.

“Fuel prices are expected to edge higher next month driven largely by the unrest in Egypt which controls the larger segment of the Suez Canal through which oil from the Middle East is transported,” said the report by Sterling Capital.