The shilling has strengthened to the 101 level against the dollar on the back of flagging greenback demand in the market, just days after weakening sharply against the US currency following the end of year festive period.
Commercial banks were quoting the shilling at an average 101.85 in the interbank market Tuesday, having gained 35 cents from Friday, when it was exchanging at 102.20 units to the dollar.
Last week the shilling had opened trading at an average of 101.80. A spike in dollar demand from corporates towards the end of the week as businesses resumed operations weighed in, however, pushing it above the 102 level raising fears of a round of volatility.
Traders said inflows from agriculture exports and remittance have also helped balance out dollar supply and demand this week, giving the shilling headroom to regain some of the lost ground.
“The shilling had an ally at the opening of the week, in the form of weak foreign currency demand, resulting in the local currency edging higher against the dollar,” said Commercial Bank of Africa in a currency market note.
“We see competing forces taking centre stage in the local currency market, limiting the movement of the shilling against the greenback within familiar ranges.”
The regulator has also mopped up liquidity in the markets in the last two days, helping ease the pressure that was building on the shilling.
The CBK on Monday took up Sh15 billion through the repo market and followed up with Sh10 billion Tuesday.
The amount of bids received, however, indicate that the market is heavily liquid, with lenders offering up Sh50 billion on Monday and Sh30.8 billion yesterday.
The interbank rate has also fallen significantly, standing at 4.7 percent down from a three-year peak of 11.3 percent in mid-December.
This liquidity has been fed (partly) into the market by the high amount of maturities on the government’s short-term debt, amid low uptake of new offers.
In December, total maturities across the three tenors of T-bills amounted to Sh93.7 billion.
The Treasury only managed to raise Sh46.7 billion from the four auctions during the month, meaning that there was a similar amount that filtered through into the market as net repayments on domestic debt.