The shilling last week closed at a three-month high against the dollar, buoyed by increased foreign inflows and liquidity withdrawal as investors pumped cash into government securities.
Lenders quoted the currency at an average of 100.98 units to the dollar in afternoon interbank trading on Friday, up 0.8 per cent during the week, the lowest average seen since mid-October 2018.
Traders said there was also reduced demand for the greenback from corporates, while there were some investors buying shillings to participate in Treasury bill and bond auctions.
“Foreign exchange counters were awash with foreign currency sellers amid increased diaspora remittances dwarfing dwindling demand from corporate players, buoying the shilling to a stronger close,” said Commercial Bank of Africa in a treasury note.
Ordinarily the shilling would be expected to come under pressure during periods of heavy liquidity in the market, but has in the past week run counter to this expectation helped by regular CBK mop-ups and investors committing huge amounts to Treasury securities auctions.
Last week, the Treasury sold a two and 15-year bonds, attracting bids worth Sh102 billion on the two tranches and accepted only Sh38.5 billion.
In Treasury bill auctions investors bid a total of Sh40.9 billion against a target of Sh24 billion, with the CBK taking up Sh26.5 billion from the bids.
At the same time, the interbank rate fell from 3.6 per cent to 3.04 per cent during the week, indicating improved banking liquidity.
Looking ahead, analysts at Genghis Capital said in a note on Friday that the shilling is likely to remain stable against the dollar, with external risk being diminished by prospects of US rates not being raised as much as had been anticipated this year.
“With the expectation of a single Federal Reserve rate hike in 2019, coupled with strong diaspora remittances, pressure on the local currency remains subdued,” said Genghis analyst Patrick Mumu.
He added the strengthening/stable shilling coupled with inflation that remains within the preferred CBK target means the regulator is likely to retain the base lending rate at nine percent in today’s monetary policy committee meeting.