Shilling stable despite low tourism and tea earnings

The Kenya shilling has weathered depressed tourism and tea earnings to remain stable in the 86 range to the dollar, helped by the Central Bank’s mop up of excess liquidity and increased diaspora inflows.

The unit has been range-bound at between Sh86.05 and Sh86.66 to the dollar since the end of January.

Analysts say that the lower tea prices and reduced tourism inflows due to insecurity fears would normally pressurise and weaken the shilling.

Tea auction prices have averaged $2.36 (Sh200) per kilogramme in the first three months of 2014, compared to $3.02 (Sh260) in a similar period last year.

READ: Kenya tea export earnings drop to Sh94bn

According to Bank of Africa head of Trading Peter Mutuku, demand for dollars from the energy sector, mainly oil marketers, has also increased in the past three months.

The counterbalance, through strong Central Bank of Kenya (CBK) support, has also been accompanied by offshore interest in government paper and the equities market which has brought in dollar inflows. Traders have also kept an eye on the upcoming Eurobond.

“The expected Eurobond has brought caution to the market, in as much as traders are avoiding speculative trading positions, so long as details of the sovereign issue remain unclear,” said Mr Mutuku.

Last week, banks were seen to be balancing their dollar sell and buy positions, indicating the caution that major players are approaching the forex market as they await the bond issue.

CBK statistics show that it has mopped up Sh93 billion worth of excess liquidity through repos and term auction deposits from the market since the beginning of March, with forex traders saying this aggressive and early move by CBK has helped stabilise the exchange rate by eliminating speculative tendencies.

“The money market was relatively liquid in the week ending April 9, 2014 supported by Government payments and net redemption of Government securities. The central bank liquidity management resulted in net withdrawal of mopped Sh15.8 billion through repo securities and term auction deposits (TAD),” said CBK in its latest weekly report.

READ: Shilling steady, seen firming as CBK drains liquidity

Diaspora inflows have also averaged higher in the first two months of 2014 compared to a similar period in 2013.

According to data released by CBK on Friday, remittances to Kenya in the first two months of the year are eight per cent higher than the inflows of a similar period in 2013, standing at $221.4 million (Sh19.2 billion).

Stability in interest rates on government paper since January has helped keep the exchange rate stable with yield differentials of less than one per cent. Interest rates of the 91-day T-bill stands at 8.8 per cent compared to 9.3 per cent per cent at the beginning of the year.

Yields on the 182-day paper stand at 9.9 per cent compared to 10.3 per cent at the turn of the year, with the 365 day T-Bill yielding 10.3 per cent against 10.6 per cent in January.

Remain flat

Commercial Bank of Africa senior dealer Joshua Anene said that improved market efficiency, with better tools to manage foreign exchange risk, means that the market is likely to remain flat — at least in the short term.

“Overall a stable interest rate outlook augurs well for the exchange rate. The short term outlook looks favourable, but in the long term the shilling may give way once interest rates in developed markets go up,” said Mr Anene.

Risk and research firm Stratlink Africa says in its April markets update that the local unit should remain range bound as supported by CBK intervention and relatively stable macro-economic forecast.

The firm, however, cautions that increased frequency of such interventions could expose the economy to shocks as usable foreign exchange reserves go down.

With CBK only seen to come into the market in the past four weeks however, foreign currency reserves remain at $6.28 billion (Sh525 billion), or 4.34 months import cover which is above the required four month cover level.