Shilling remains resilient as Africa currencies plunge

The Kenya shilling has weathered a storm to marginally perform better than other African currencies since the beginning of the year as most commodity-backed currencies took hits from falling prices and lower demand from large industrial powers.

African currencies remain under pressure against the dollar despite a rally in the second quarter that has seen some recover from all-time lows to the US currency.

Although the shilling has weakened 1.8 per cent to the dollar this year, the trend has met a resistance level at around 88 units to the green back, supported by liquidity management by the regulator.

The shilling opened Monday weaker to the dollar, at 87.90/88.00, due to market caution over the saba saba rally.

“This weakening is not demand driven, and we are expecting the currency to correct by the end of the day or early Tuesday,” said Bank of Africa treasury trader Gerishon Kanori.

There was also some spillover of demand from importers into the early part of July from the usual end-month demand from June, he added.

While the shilling has exchanged in a narrow band to the US currency this year, other East African currencies have seen wider variation, with many averaging up to three per cent depreciation to the US currency in 2014.

The Uganda shilling is exchanging four per cent down to the dollar, at 2,620 units, Tanzania shilling 4.5 per cent down at 1,653 units and the Rwandese Franc three per cent down at 690 units to the dollar.

Countries dependent on commodity sales have been hardest hit as demand from China slows down, especially for those with wide deficits and lower alternative foreign capital inflows.

READ: China woes pile pressure on Africa currencies

Data from African Alliance shows that the Ghana Cedi is exchanging 30 per cent lower to the dollar at 3.34 units in the year-to-date, making it the worst performing among the 18 currencies under review.

The Zambia Kwacha is the second worst performer dropping 11.5 per cent to exchange at 6.22 units to the dollar.

Ghana is, however, looking at its own Eurobond issue slated for this month to help boost its reducing foreign exchange reserves, although dealers say such monies which are earmarked for projects take time to have an impact on the local money market.

“In Kenya’s case, for instance, the government will only need to convert the dollars to local currency once the projects kick off and bureaucracy means we expect a delay before CBK comes into the market with the dollars to convert into shillings” said Mr Kanori.

Only the Malawi Kwacha has gained against the dollar for the first six months of the year, rising 8.8 per cent.

For the shilling, Central Bank is expected to reduce its intervention in the market as the currency stabilises, having stayed out of the market over the past week to allow for liquidity redistribution.

Forex market analysts at Genghis Capital expect redemption of government securities to slow further in July, keeping the regulator from the money market as the exchange rate remains under control. They expect a stable shilling within the 87 support level against the dollar.

“Even so, we may see the regulator stepping into the money market occasionally during the month to roll over liquidity created from maturing money market instruments; that is Repurchase Agreements and Term Auction Deposits,” said Genghis fixed income and forex report.

Support for other East African currencies is expected to come from inflows from cotton exports and end of quarter tax payments in the case of Tanzania and reduced demand for dollars by importers in the case of Uganda.