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Tighter market liquidity offers shilling a relief

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Commercial banks were trading the shilling at a flat 103 units to the dollar by midday Monday. FILE PHOTO | NMG

Tighter liquidity in the money markets as a result of Central Bank’s mop-up activity and tax payments have eased the shilling’s recent run of depreciation against the green back.

Commercial banks were trading the shilling at a flat 103 units to the dollar by midday Monday, gaining from the average of 103.10 at close of trading Friday.

CBK in its latest weekly markets bulletin said reserves fell to Sh8.4 billion at the end of last week from Sh13.5 billion the previous week, with the number of deals also coming down.

This indicates a tightening of the market, also shown in the interbank rate which rose to four per cent on Friday from 2.9 per cent the previous week.

Last week, the regulator was actively mopping up money from the market through the repo market. After mopping up Sh14 billion early in the week, CBK came back for another Sh10.6 billion on Friday, tightening the market further.

Analysts at Genghis Capital said liquidity is likely to be drained further should the regulator choose to issue a tap sale of the infrastructure bond floated earlier this month, while lenders are also likely to be looking for cash to settle tax payments.

“We anticipate slight tight liquidity in the market, being the incipient days of the new (cash reserve ratio (CRR) cycle and the expected statutory corporate tax payments,” said Genghis in a note.

“We also anticipate a tap sale on the infrastructure bond to mop-up the rejected cash from the initial auction and also endear to investors who were squeezed out by constrained initial sale period.”

The tight market was Monday offering some relief to the shilling after last week’s depreciation where it fell to a 10-month low against the dollar.

Scarcity in the market increases the shilling’s value. Yesterday, it was also helped by hard currency inflows from the diaspora, as well as some inflows from foreign investors eyeing the infrastructure bond.

The Genghis analysts said the pronouncements from a senior US Federal Reserve official that US interest rates are close to their estimated neutral rate also offered respite to the shilling and other battered emerging and frontier currencies, with the implication being that the Fed may not raise US rates as far as had been estimated earlier.

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