Shilling on the back-heel against dollar on high mid-month demand

The shilling depreciated further Thursday with banks selling the dollar at 103.63 units at the opening of markets, reflecting a Sh2.40 drop since the end of last week.

Central Bank of Kenya (CBK) data indicated that banks were buying the greenback at Sh103.43, higher than last week when it stood at 101.07, indicating low hard currency supply.

Analysts attribute the weakening to mid-month demand, even as the large export-import gap continue to weigh heavily on the currency in the medium term.

“The Kenya shilling continued to weaken against the greenback on the back of high mid-month demand by businesses,” said ABC Bank in a forex and money markets update.

The depreciation has forced the CBK to engage in fervent cash mopping up by giving rising rates to repos (repurchasing agreements), Treasury bills and bonds in a bid to reduce the amount of shillings chasing dollars in the market.

As of Wednesday, the CBK repo rate stood at 18 per cent from slightly above 10 per cent just a few months ago.

The182-day Treasury bill is now at 12.26 per cent from less than 10 per cent from the same period.

In the most recent floating of a two-year Treasury bond, investors asked for an average rate of 17 per cent.

The CBK instead accepted bids with an average interest rate of 14.78 per cent, two percentage points higher than in a similar issue previously.

As a result of accepting only the lower bids, the CBK managed to raise about half of the targeted funds.

The coupon rate is now the highest for any government paper currently listed on the Nairobi Securities Exchange.

Analysts at Old Mutual Securities say the shilling is likely to weaken further to Sh105 to the dollar because of factors ranging from the widening currency account deficit to the speculated tightening of the US money market next month.

“Fundamentals suggest that the shilling may further weaken below Sh105 to the US dollar,” said Old Mutual Securities in its latest report. The analysts said even the CBK’s continued mopping up of cash supply will not stop the slide.

Pushing up inflation

“Monetary policy tightening may not effectively slow the depreciation because weak exports, growing imports and a slowdown in capital inflows weigh on the currency; as will US rate increase that is expected to come next month,” said Old Mutual Securities.

Other data from the CBK indicate that Old Mutual’s prediction is already being achieved in some of the forex bureaus. For example, Ventures Forex Bureau sold the dollar at an average of Sh105.75 when markets opened on Wednesday while Taipan Forex sold it at 105.50.

Most of the forex bureaus sold the greenback at Sh104 and above on Wednesday. Commercial banks, on the other hand, sold the dollar at relatively lower rates.

Citigroup has recently said the weakening of the shilling is likely to put pressure on prices of imported goods, pushing overall inflation above the prescribed upper limit of 7.5 per cent.