The shilling gained one per cent against the dollar last week to consolidate in the 100 level, with dealers saying they expect further greenback inflows from foreign portfolio investors to help keep the local currency strong.
Majority of commercial banks quoted the shilling at 100.70/90 to the greenback by midday on Friday, unchanged from Thursday’s closing level, taking the gains during the week to 1.07 per cent having opened on Monday at 101.80/102.00.
Dealers said that portfolio inflows from foreign investors, especially those looking to buy government securities, have helped strengthen the shilling as have diaspora remittances.
“Some of these inflows were targeting the infrastructure bond tap sale, but we have also seen increased interest in infrastructure bonds in the secondary market.
"The Central Bank of Kenya reserve levels at the end of this week will show us the level of intervention the regulator may have put in to stop volatility on the gain side,” said a bank treasury dealer.
CBK would normally buy dollars from the market if the shilling gains too quickly, although the regulator has always insisted that they have no preference over the exchange rate or the direction it takes at any particular time.
The shilling has also been gaining due to tightening liquidity in the money markets.
CBK was last week offering support through the reverse repo market, which normally comes in handy for smaller banks which sometimes struggle to access large liquidity pools dominated by their larger peers.
On Friday, the regulator was offering Sh5 billion in the reverse repo market in which the CBK temporarily buys government securities from banks helping improve cash positions.
The interbank rate, which was largely flat through the week, is also likely to start rising as a result.
“We expect upward pressure on the rate to begin in the coming week as we approach the end of the CRR cycle,” said Genghis Capital in a market note.