The Kenyan shilling edged down on Wednesday, but stayed within its recent ranges as the market assessed the outlook for liquidity, after a sudden surge sent the central bank scrambling to soak it up.
The average weighted interbank lending rate plunged by 11 percentage points over a span of three sessions to a low of 10.3 percent on April 5 after the government paid its bills and investors redeemed billions of shillings in debt.
In response, the central bank mopped up 14.6 billion
shillings ($175.4 million) through repurchase agreements in the two sessions to Wednesday, as it sought to stabilise the rates.
Traders said the market was keenly watching to see how much the bank would absorb, with a failure to adequately mop up the surplus cash making it possible to build up long dollar positions, hitting the shilling.
"The risk is, if they do not take out the excess liquidity,
people could start playing in the currency market by easily funding long dollar positions," said a senior trader with a commercial bank.
At 0657 GMT, commercial banks quoted the shilling at
83.10/30 per dollar, slightly weaker than Tuesday's close of 83.00/20, but well within its recent range of 82.90-83.40.
Others said the central bank's mopping up operations could actually shield the shilling in the days ahead.
"There is some demand from the energy guys. But we expect continued mopping of liquidity by the central bank to support the shilling," said John Muli, a trader at African Banking Corporation.
The shilling has gained 2.3 percent against the dollar this