The shilling continued to experience depreciation pressure Thursday on heightened dollar demand as the market reacted to plan by the Central Bank of Kenya (CBK) to purchase dollars from the market to bolster forex reserves.
Commercial banks quoted an average of 103.00 in morning interbank trading, before easing back to 102.85 in the afternoon on the back of liquidity withdrawal by the regulator. It had closed trading Wednesday at an average of 102.90.
Traders reported that importers were looking to stockpile dollars in light of the weakening shilling, while banks were also actively buying perhaps with an eye on the chance to sell on to CBK.
“The local foreign exchange market was in a frenzy from the onset as key greenback buyers emerged from the shadows to compete for the locally available dollar stockpile,” said NCBA in a note to clients.
“The expectation is that the shilling will trade on the defensive if the rush for the greenback by corporate buyers endures.”
CBK announced on Tuesday that it will buy a total of $400 million (Sh41.2 billion) from commercial banks in the next four months— $100 million (Sh103 million) per month— in order to bolster its forex reserves that at the end of last week stood at $8.409 billion (Sh866 billion).
The purchase, the CBK said, will bolster its preparedness to deal with rising uncertainties in the global market over the coronavirus outbreak.
The banking regulator said shifts across the globe, including a significant drop in oil prices that eased pressure on Kenya’s imports, have opened a window for a more formal dollar purchase, arguing that it will purchase a minimum $1 million (Sh100 million) from banks at prevailing rates in each deal.
Before the announcement was made on Tuesday, the shilling was trading at an average of 101.37 to the dollar, having held onto a tight range since the beginning of the year. CBK has been relying largely on liquidity management to prevent volatility. On Thursday, CBK withdrew Sh20 billion through term auction deposits, having indicated that the market was exhibiting excess liquidity.