Investor interest in Eurobond expected to weaken shilling

End-of-month demand for dollars coupled with investor attention towards the upcoming Eurobond are likely to see the Kenya shilling weaken further against the US currency, currency dealers say.

According to traders in commercial banks, the local unit is coming off a boost from oversubscription of the reopened Sh10 billion 15-year Treasury bond, which attracted dollar inflows.

The bond issue attracted 448 bids amounting to Sh23.44 billion against the Sh10 billion target, with 61.6 per cent (Sh14.4 billion) eventually accepted.

“The dip from 86.50 to 86.10 to the dollar was attributed to the bond, which provided support from offshore dollar inflows. Demand for dollars is however there from importers, and the likely direction is a strengthening of the dollar against the shilling,” said Bank of Africa head of trading Peter Mutuku.

In the last two weeks of January, an oversubscription on the Sh10 billion 10-year-fixed Treasury bond that attracted bids worth Sh40 billion strengthened the shilling pushing it below the 86 level where it held until the beginning of February.

Commercial banks posted an intra-day low exchange rate of 86.45/55 to the dollar Tuesday, having weakened from Monday’s average closing of closed 86.25/35. The local unit had closed the previous week at a two week high of 86.10/25.

The Central Bank indicative average rate stood at 86.24 yesterday, weaker than Mondays 86.15.

The end month demand for dollars has been coming from importers in the energy and manufacturing sectors as they settle outstanding payments to suppliers.

Forex traders say the upcoming Eurobond issue will have an impact on the local currency, with investor attention increasingly turned towards the sovereign bond.

The Eurobond would bring an influx of dollars into the local market thus reducing pressure on the local currency.

“The Eurobond is a factor that will determine where the dollar will trade. A successful issue would strengthen the shilling,” said KCB senior forex dealer Sheikh Mehran.

According to the Central Bank’s monetary policy committee after its January meeting, the forthcoming Sovereign Bond issue will further bolster the country’s foreign exchange reserves and support exchange rate stability.

The shilling has been trading above the 86 level to the dollar since the beginning of February, touching a monthly high of 86.06 on February 7.

In the past three weeks, the local unit has lost ground on the major currencies, with the exchange rate against the euro weakening from 116.95 units on February 7 to 118.47 yesterday, according to the CBK indicative rate.

The rate against the Sterling Pound has in the same period weakened from 140.40 units to stand at 143.74 Tuesday.

The local unit was largely unaffected by the emerging and frontier markets jitters that followed the decision by the US Federal Reserve to start the taper of its bond buying stimulus programme, retaining a stable exchange rate.