The Central Bank of Kenya (CBK) was Tuesday thrust into the limelight as the shilling continued its slide against the US dollar, touching 104 units to the greenback as turbulent trading that began last week persisted.
The market is particularly waiting to see how far the CBK is willing to go in support of the shilling after last week’s response in which it attempted to stabilise the currency through market operations.
While traders have attributed the depreciation to heavy dollar demand from importers — especially in the oil sector — the regulator appeared to blame speculators for the turbulence.
Bloomberg, a news syndication service, Tuesday reported that the CBK had stopped forex traders from making comments “that can influence the currency to decline outside of normal market fundamentals,” taken to mean speculation.
The CBK had not responded to questions on the matter by the time of going to press. Traders, however, said that CBK had sold dollars in the market to stem volatility that has seen the shilling shed 1.3 per cent of its value since the beginning of the year.
Commercial banks yesterday quoted the shilling at 103.90/104.10 to the dollar, compared to 103.90/104.00 on Monday, while the CBK’s indicative average rate stood at 103.80 compared to 103.66 on Monday.
The Kenyan currency opened the year at 102.50 to the dollar.
“Petroleum importers are looking at the Opec production cut deal and building up reserves in anticipation for the expected price rise that will require more dollars,” said a dealer at a local commercial bank, whose identity cannot be revealed because of the CBK gag.
The shilling has also depreciated against the euro, shedding 2.4 per cent of its value since the year began to stand at 109.67.
Should the depreciation against the hard currencies persist, the CBK faces the prospect of using more of its valuable forex reserves in support of the shilling.
READ: Shilling weakens to a 15-month low on importer demand
It could also cut back the shilling’s liquidity from the market – a move that would hurt small banks already struggling for cash.
This is the first time the shilling is hitting the 104 mark since October 2015, when it was in the middle of a sharp depreciation that took it to 106 to the dollar.
The CBK at the time took a hard stance against currency traders, meeting them regularly to discuss the exchange rate.
Currency speculators normally hoard dollars anticipating that the shilling will regain lost ground affording them opportunity to sell the greenback at huge margins.
Stanbic Bank regional economist Jibran Qureishi said market fundamentals do not point to sustained pressure on the shilling -- indicating that companies that are building up their dollar position may burn their fingers.
“This being an election year there isn’t any compelling empirical evidence to suggest that the exchange rate should come under severe pressure. In fact, if companies eventually adopt a wait and see approach, import demand could remain steady,” Mr Qureishi said during Tuesday’s release of the bank’s 2017 economic outlook report.
“The IMF stand-by credit facility along with potential new external loan issuances in 2017 may yet help provide adequate ammunition for the CBK to ensure that any weakness in the exchange remains orderly.”
Last week, the Central Bank grew its reserves by $87 million (Sh9 billion) to $7.06 billion (Sh734 billion) even as it remained active in the market to support the shilling.
The current reserve level, however, represents a decline of $686 million (Sh71.3 billion) over three months, attributable to the currency support activity in the turbulence that followed November’s election of Donald Trump as US president, revaluation and foreign debt repayment.
How the CBK’s Monetary Policy Committee (MPC), which is scheduled to meet at the end of this month, will tackle the exchange rate turbulence should it persist remains to be seen.
The MPC has been tipped by a number of analysts to hold the base lending rate steady at 10 per cent, but should inflation be on the rise due to a raging drought and exchange rate turbulence there will be pressure to tighten the policy, with higher bank lending rates as the knock-on effect.
Mr Qureishi said that headline inflation is likely to rise until April, before easing in July after which a more durable decline in prices in the final quarter of 2017 is expected.
Food prices are the key driver of the expected inflationary pressure, making the persistence of drought a key factor in pricing going forward.