The shilling has come under pressure this week from end month dollar demand and high liquidity, weakening to an average of 103.40 against the dollar in yesterday’s trading.
Last Thursday, the currency had gained to touch 102.96 against the greenback, the first time it went under the 103 level in five weeks.
Demand for dollars from importers has, however, weighed against the shilling as they look for hard currency to settle overseas obligations to suppliers.
“The shilling gave up some of its previous sessions’ gains on account of increased foreign currency appetite from corporate and interbank players, overwhelming erratic foreign currency inflows to leave it weaker at the closing bell,” said Commercial Bank of Africa in a daily treasury note yesterday.
The inflows are mainly from diaspora remittances, horticulture exports and portfolio investors looking to buy government securities.
Traders said excess liquidity in the market has also been a factor.
The Central Bank of Kenya was in the market to mop up excess funds yesterday, taking out a total of Sh16.95 billion in seven and 14-day repurchase agreements (Repo).
On Monday, the regulator took out Sh34.6 billion through the same open markets operation.
The liquidity is, however, not evenly distributed in the banking sector, going by activity in the interbank borrowing market.
The interbank or overnight rate went up on Monday to 4.22 percent from 3.67 percent on Friday, indicating that some lenders were in the market for cash and were therefore willing to pay a higher rate to access it.
Volumes also went up to Sh10.45 billion on Monday compared to Sh8.55 billion on Friday, although they remained well below last week’s high of Sh21 billion seen on Thursday.
Should exchange rate volatility set in, eyes will be on CBK to see whether the regulator will be willing to deploy forex reserves to calm the market down.
At the end of last week, CBK held reserves worth $9.386 billion (Sh970 billion), which are the equivalent to 5.87 months of import cover.
Weakening of the shilling has come at a time central bank is demonetising old notes.