Pressure on shilling eases on Central Bank liquidity mop-up

The pressure on the shilling is expected to ease in the near term as the market adjusts to aggressive liquidity mop-up by the Central Bank of Kenya (CBK) and projected inflows from a new infrastructure bond.

Central Bank has continued to support the shilling through liquidity mop-ups and was in the market for Sh3 billion Wednesday — in addition to seeking to mop up Sh15 billion on Tuesday.

Banks reported the shilling strengthening Wednesday, closing at 89.05/15 compared to an opening 89.30/40 to the dollar.

“The wind in the market is changing in the shilling’s favour once it was realised that the regulator is not going to let the currency slide too far,” said Commercial Bank of Africa senior dealer Joshua Anene.

In September the shilling was weighed down by subdued dollar inflows as well as relatively high liquidity in the money market with the exchange rate to the dollar weakening up to 89.50.

The shilling met a resistance level of 89.50 prompting stronger CBK intervention through sale of dollars directly to the market.

I&M Bank head of trading Sheikh Mehran said in seeking to stabilise the exchange rate CBK has done a good job of mopping up excess liquidity. He sees a bias towards a stronger shilling going forward.

The mop-up of excess liquidity makes it more expensive to hold on to dollars, reducing demand.

READ: CBK continues liquidity mop-up to prop up shilling

On the infrastructure bond, past demand trends have shown strong interest from foreign investors, that according to the dealers should complement the support coming from CBK for the currency.

“In the near term, because of the infrastructure bond, there will be considerable inflows. This is a tax-free bond that should attract a lot of foreign interest,” said Mr Mehran.

The Central Bank is yet to release details of the bond such as the tenure, amount and offer rate.

The last infrastructure bond offer was in October 2013 in a reopened sale. It was meant to be for three months to December 2013, but the target of Sh16 billion was achieved on the first sale in October, at a rate of 12.29 per cent.

With the United States Federal Reserve set to wind up its quantitative easing programme, inflows from the US are expected to slow due to expected improvement of interest rates in that country.

Mr Mehran says, however, that the drop in American inflows should be countered by European inflows as the EU sets in motion own quantitative easing that has sent European interest rates to the basement.

Risk remains though should the high liquidity persist. Genghis Capital fixed income analyst Vinita Kotedia said weak macroeconomic fundamentals remain material downside risk to the currency.