The shilling hit a ceiling of Sh129.19 to the dollar as it traded in a narrow range in September, defying expectations that it would gain against a globally weakening dollar after the US interest rate cut two weeks ago.
Traders pointed to Central Bank of Kenya (CBK) dollar buying activity in the market to prevent volatility, while also reporting that there was reduced activity in the forex market due to the limited margins on the currency pair.
CBK records show that the regulator added $678 million (Sh87.6 billion) to its official forex reserves between August 29 and September 26, raising its dollar holdings to $8.03 billion (Sh1.04 trillion), equivalent to 4.1 months of import cover.
The CBK adds to its dollar holdings by buying the foreign currency proceeds of the government’s external loans or through local market purchases.
It, however, does not disclose details of its activity in the local forex market, nor do the banks that transact with the CBK in foreign exchange.
The shilling opened the month trading at an average of Sh129.19 to the dollar, and closed out the period at the same rate, as per official rates published by the CBK. During the month, it touched a low of Sh129.30 and a high of Sh129.17, but in most sessions, it was trading at an average of Sh129.19.
“We have seen them (CBK) in the market, preventing volatility on the gain side. Trades have also reduced with the thinner margins and limited movement,” said a forex dealer in a commercial bank.
The US Federal Reserve cut its base rate by half a percentage point to a range of 4.75 to 5.0 percent, signalling reduced returns on US financial assets that have in the past two years attracted capital from the frontier and emerging markets to the detriment of currencies in these economies.
The rate decision, which is likely to be followed by a further two cuts before the end of the year, thus points to capital outflows from the US, which will improve dollar liquidity in smaller markets, hence the ongoing weakening of the US currency.
In the year-to-date, the shilling has gained by 21 percent on the dollar, making it one of the top-performing currencies on the continent and reversing last year’s losses of a similar margin that saw it rank as the worst-performing African currency.
The reversal in fortunes has largely been attributed to CBK's activity to bring back the interbank forex market that had all but ground to a halt last year.
The National Treasury’s successful refinancing of the maturing $2 billion 10-year Eurobond that was issued in 2014 also calmed down the market, reducing dollar hoarding by jittery corporates and investors.
In 2023, the CBK had indicated that the shilling was artificially overvalued but later noted that it had overcorrected when it touched an all-time low of Sh160 to the dollar in the first quarter of 2024.
To bring the rate down, the CBK raised its base rate to 13 percent, anticipating that dollar inflows into the local debt market would help the shilling.
