Demand for greenback puts strain on shilling

Kenya’s shilling was little changed against the dollar yesterday, but was seen under pressure due to demand from importers and a general weakening of emerging currencies against the dollar.

In early trade, commercial banks quoted the shilling at Sh105.00/Sh105.20 per dollar, barely changed from Sh104.95/Sh105.15 recorded on Thursday.

The shilling has been edging closer to its all-time low of about Sh107 to the dollar, set in October 2011. One trader at a Nairobi-based commercial bank said the shilling would remain vulnerable to further losses as emerging market currencies wobble.

“We are also seeing a bit of buying from importers, who are bringing forward their orders as they are looking at the market and thinking ‘shilling may weaken’,” said the trader.

The local currency, down 16 per cent this year, has come under pressure from a broad rally in the dollar, Kenya’s high current account deficit and poor tourism inflows after attacks by Somalia’s al Shabaab insurgents.

The Central Bank has in the past few months periodically intervened in the market to support the currency by selling dollars. It also regularly mops up excess liquidity. Yesterday, the bank announced that it planned to mop up Sh10 billion ($95 million) in excess liquidity from the money markets.

The bank uses repurchase agreements and term auction deposits to soak up liquidity, making it costly to hold dollars and in turn giving the shilling support.

Meanwhile, yields on Treasury bills are expected to rise, as banks prefer to keep their money in higher-yielding term auction deposit, or TADs, used by the Central Bank to mop up liquidity in the interbank market.

Subscription levels are expected to remain relatively low.
Yields of 91-day, 182-day fell at auction this week, while yields on the 364-day bills were up. The yields at this week’s auction of bills were 11.502 per cent for 91-day, 12.305 per cent for 182-day and 13.967 per cent for 364-day.

“I think the yields should continue edging up, while the subscription levels should remain relatively low,” said Mathangani Kariuki, a fixed income trader at Kestrel Capital.

The bank normally uses liquidity management, including repurchase agreements (repos) as a tool for stabilising the foreign exchange rate by making it slightly more expensive for traders to bet against the shilling.