This week marked the first time since December 2011 that the shilling breached the Sh90 level on the Central Bank indicative mean log. PHOTO | FILE
What you need to know:
This week marked the first time since December 2011 that the shilling breached the Sh90 level on the CBK indicative mean log.
The shilling remained above the Sh90 level to the dollar yesterday as banks reported cautious trading in anticipation of possible Central Bank intervention through sale of dollars.
The shilling yesterday opened in commercial banks at Sh90.05/15, falling to Sh90.15/25 in mid morning trade. Later in the afternoon the currency strengthened slightly to Sh90.10/20, but was still on course to close lower than Wednesday’s level.
The Central Bank of Kenya (CBK) on its part had the shilling at an indicative opening mean of Sh90.06 to the dollar, the highest since the end of November 2011. This week marked the first time since December 2011 that the shilling breached the Sh90 level on the CBK indicative mean log.
“As we breached the Sh90 mark the market factored in possible CBK action. Trading today is cautious because of persisting anticipation that the regulator might step in. The strengthening of the dollar is, however, a global phenomenon. Across Africa we have seen currencies weakening to the dollar,” said Commercial Bank of Africa (CBA) senior dealer Joshua Anene.
The US currency has been gaining against other world currencies, attributed to higher economic growth numbers in the US in the third quarter compared to other developed markets such as the Eurozone and Japan.
The “flight to safety” of capital back to the US is also due to higher equity returns, which means it does not pay for investors to take on board the additional risk that comes with investing in emerging and frontier markets. Global recovery has also been slower than expected, leading to some caution on the part of some international investors.
For the shilling, the continued draining of liquidity from the market by CBK is seen as a necessary measure to control the rate of movement, but is not sufficient to stop or cause depreciation.
Over time, sources of foreign exchange inflows have also slowed down, with tourism taking a hit due to travel advisories at a time when international prices of agriculture commodities are also falling.
The country’s import bill on the other hand is rising due to capital expenditure on equipment for large infrastructure projects and oil purchases. This has strained the demand and supply balance of hard currency through increased demand for dollars to pay for the imports.
Dollar demand in the local market has across the board been led by the energy and manufacturing sectors, dealers say. Importers are looking to lock in their dollar positions early in case the shilling depreciates further towards the end of the month.
In the short term, in the absence of any direct selling of dollars by CBK, relief for the shilling is likely to come from the falling international oil prices, which would ease the country’s import bill.
“Relief in the longer term will come from the anticipated inflows from oil and minerals, as well as the improved production capacity of Kenya once the infrastructure projects are completed,” said Mr Anene.
The price of a barrel of oil on the international market is now below $80 for the first time in four years.
