The shilling strengthened against the dollar Thursday in the first trading session of the New Year, buoyed by remittances and tightening liquidity in the market.
Dollar demand has also eased as the market comes off the normal end of month demand from importers, allowing the shilling to once again dip below the 101 level against the greenback.
Commercial banks quoted the shilling at an average of 100.95 units to the dollar in afternoon trading yesterday, compared to the closing rate of 101.34 on Tuesday, December 31. The market was closed on January 1 for the New Year holiday.
Traders said remittance inflows were providing enough supply to cover dollar demand.
At the same time, Central Bank of Kenya (CBK) reported that liquidity in the market was balanced, with the regulator not active in its open market operations as a result.
In the week after Christmas, the market had seen a spike in liquidity which combined with end-month dollar demand weakened the shilling to the 101.30 level from 100.70. Liquidity withdrawal by CBK through repo (repurchase agreements) have helped, however. On Tuesday, the regulator took out Sh20 billion through seven-day repos.
Overall, the shilling has enjoyed relative stability against the dollar in the past one year, helped by healthy forex inflows and regular CBK intervention to iron out any early signs of volatility, largely thorough liquidity withdrawal.
Having opened 2019 at an average rate of 101.85, the unit ended the year 0.5 percent up, providing a measure of relief to importers, but slightly affecting negatively exporters who are mainly paid in dollars for overseas sales. Another contributor to the stability has been the narrowing of the current account deficit—which measures the difference between the forex inflows and outflows.