The Kenyan shilling fell more than one percent against the dollar on Wednesday to hit a record low of 97.20 against the greenback after the central bank moved to ease money market liquidity ahead of two debt auctions.
The Central Bank of Kenya said it was offering shillings through reverse repurchase agreements for the first time since
August 9, a move aimed at injecting liquidity after a spike in borrowing by banks through the overnight window on Tuesday.
The central bank has recently struggled to define a consistent policy path, as it attempts to prop up a shilling weakened by the global economic crisis while keeping policy loose enough to support lending and spur growth.
The shilling, which has lost more than 20 percent against the dollar so far in 2011, traded at 97.20 at 0826 GMT, Thomson
Reuters data showed KES-D1.
At 0900 GMT, commercial banks quoted the shilling 96.90/97.10, down sharply on Tuesday's closing price of
"There is short-term tightness in the market because 3.2 billion shillings was borrowed in the overnight window
yesterday so I think that is what they were trying to sort out," said a Nairobi-based senior trader.
"So the currency has taken a cue from the liquidity (situation)," he said.
The central bank will auction 10 billion shillings ($104 million) of 2-year Treasury bonds and 4 billion of 182-day
Treasury bills later on Wednesday.
"The markets are extremely illiquid because of the global scenario at the moment. So a small size which would normally not move the market is going a long way in pushing the market," said Dickson Magecha, trader at Standard Chartered in Nairobi.
At an emergency meeting last week, the Central Bank of Kenya said it would defend the shilling. But some traders said its
absence from the market on Tuesday when the shilling fell through 96.0 for the first time showed its resolve was weak.
"The central bank needs to back up its words," said another trader. "The trend has been talk big, don't act."
Some market players said, however, that if the bank simply offloaded hard currency the reprieve could be short.
"If central bank comes in (to sell hard currency), you may see a reprieve, the shilling may come off its all-time low, but
it's not sustainable. The shilling will just slip back," the trader said. "The shilling is on its own."
Double-digit inflation, deteriorating balance of payments and a crisis of confidence in Kenya's monetary policy-making
have battered the shilling this year.
Kennedy Butiko, deputy Treasurer at Bank of Africa, said the central bank might not intervene because the shilling's demise was driven by strong demand for the dollar both at home and abroad.
"If (the shilling's fall) is demand driven then any intervention will be useless," Butiko said, adding that dollar
demand was likely to pick up towards the end of the month.
"I don't see anything pointing to a strong shilling at the moment with all the gloom in Europe, we can only predict new
lows in the coming days," said Butiko.