Shilling steady, seen firming as CBK drains liquidity

The shilling was little changed on Monday against the dollar, but traders expected the currency to strengthen during the week as the central bank mops up liquidity and companies sell dollars to pay taxes.

Leading commercial banks quoted the local currency at 86.60/70 at 0801 GMT, from 86.55/65 on Friday.

The Central Bank of Kenya (CBK) has frequently drained liquidity over the past month after overnight borrowing rates tumbled. The falling overnight rate made it cheaper for banks to fund long dollar positions and put pressure on the shilling.

By removing excess liquidity from the market, the central bank makes it more expensive to hold onto long dollar positions, which in turn supports the shilling.

The central bank said on Monday that it intended to mop up Sh17 billion ($196.08 million) in excess liquidity from the money markets during the day.

Last week the bank mopped up a total of Sh32.2 billion.

"I expect the shilling to be slightly up this week on tax payments by corporates, who will be selling dollars, as well as the central bank's aggressive mopping up," said Sheikh Mehran, senior trader at the Kenya Commercial Bank.

"I see the shilling trading at 86.45/55 by end of the week," he said.