The Central Bank of Kenya last week mopped Sh13.2 billion from the market through repurchasing agreements (repo) securities and Sh1.1 billion through term auction deposits.
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Currency dealers said corporate Kenya has increased its demand for forward contracts, whereby one secures currency at a fixed price in advance of a future payment.
This is in a move to avoid the risk of volatility that characterised last year and exposed them to forex losses.
Hedging normally allows banks enough time to recover dollars sold out to clients as opposed to spot purchases that increase anxiety in the market as banks look for dollars to meet deman
Increased currency hedging activities and withdrawal of liquidity from the market by the Central Bank have helped the shilling to stabilise, limiting the likelihood of imported inflation.
Currency dealers said corporate Kenya has increased its demand for forward contracts, whereby one secures currency at a fixed price in advance of a future payment.
This is in a move to avoid the risk of volatility that characterised last year and exposed them to forex losses.
Hedging normally allows banks enough time to recover dollars sold out to clients as opposed to spot purchases that increase anxiety in the market as banks look for dollars to meet demand.
This tends to increase volatility.
Dealers at KCB and Commercial Bank of Africa said more importers have taken up forward contracts this year for fear of volatility.
The Central Bank of Kenya last week mopped Sh13.2 billion from the market through repurchasing agreements (repo) securities and Sh1.1 billion through term auction deposits.
This was against repo maturities of Sh9.2 billion and term auction deposits maturities of Sh9.6 billion.
Analysts say this will help to lower currency risks giving regulators room to cut the cost of credit inline with falling inflation.
The key concerns for the monetary policy committee had been inflation and currency risks but inflation had fallen significantly from 10.05 to 7.74 per cent between June and July.
“We have witnessed an increase in demand for forward contracts this time of the year and most of them have not matured, spot purchases are therefore fewer hence less demand,” said Duncan Kinuthia, head of trading at Commercial Bank of Africa .
With a more stable shilling in a climate of falling inflation, analysts say this sets the stage for the central bank’s Monetary Policy Committee to lower the policy rate or the Central Bank Rate.
“We see this stability giving the central bank a strong case to further adjust interest rates downwards,” said Jeremiah Kendagor, the head of trading at KCB.
The central bank has been active in the market mopping up liquidity helping to smoothen out volatility in the forex market.
The currency is also benefiting from remittances from Kenyans working abroad which increased by 46.7 per cent in the first half of this year.
In the six months to June the country received Sh50.67 billion ($596.23 million), compared to Sh34.55 billion ($406.55 million) in the same period last year.
