Shilling touches 87 on Egypt oil supply disruption fears

The shilling Tuesday touched the 87 units exchange rate against the dollar as the market factored in fears of oil price increases following the unrest in Egypt and ahead of the Central Bank’s monetary policy committee meeting.

This is the lowest the local currency has dropped in the past four months.

“It is basically driven by demand (for dollars), but I think at the same time some people are expecting that we could see a rate cut,” said Peter Mutuku, a dealer at Bank of Africa before CBK announced its decision to leave interest rates unchanged after close of the markets.

The currency traders’ reaction to CBK decision will be reflected in Wednesday’s movement of the exchange rate. A rate cut indicates CBK’s desire of lowering interest rates, which could lead to some foreign investors exiting the bonds leading to a weaker shilling.

CBK has been on a monetary easing stance with an aim of the revamping the economy through lowering the cost of credit.

Analysts also attributed the weakening to the instability in Egypt, which is a major importer of Kenyan tea and key transit route for oil through the Suez Canal.

READ: Military takeover in Egypt now hits Kenya tea exports

“The Kenya shilling weakened on Monday as oil importers bought dollars to build up their stocks on concerns that the unrest in Egypt could send energy prices higher,” said ABC Bank in its notes to investors sent yesterday morning.

International media outlets reported persistent fears that the turmoil in Egypt could disrupt passage of oil vessels through the Suez Canal, a conduit for the shipment of about a quarter of the world’s oil.

Dealers also noted that the market had low dollar supply as traditional exporters, including tea for which Egypt is a major destination, were not feeding the market.

The Central Bank has maintained foreign currency reserves above the statutory minimum of four months import cover, giving it muscle to defend the shilling.

As at end of last week, it had $5.8 billion in reserves covering an amount equal to the country’s 4.2 months import bill.

Kenya’s growing import basket has been a source of constant concern for the Central Bank. Increased diaspora remittances have helped support the shilling even as the country’s balance of trade deficit continues to grow.

Tuesday the analysts were divided on the optimal decision of the MPC, with some supporting a marginal cut while others called for the rate to remain unchanged.

“The rates might go farther down to stimulate the economy, since inflation seems to be under control,” said Dr X. N Iraki, a lecturer at the University of Nairobi’s Business School.

However other analysts believe that there was no need for a rate movement but rather to ensure that the past changes were transmitted to the public.

“I think the right thing to do is for the Central Bank to leave rates unchanged. The key challenge for the Central Bank is not the CBR rate—it is the failure of transmission of the CBR rate into commercial lending rates,” said Aly-Khan Satchu, the managing director of Rich Management, a financial advisory and data vending company.