CBK intervention supports weakening local currency

By Morris Aron

After a turbulent two months characterised by high volatility in the foreign exchange market, the shilling is expected to strengthen against major currencies, while assuming relative stability in the short to medium term.

Traders and analysts say that the recent decision by the market regulator, Central Bank of Kenya (CBK) to ban commercial banks from borrowing cheaply using its emergency overnight window and lending to each other at a higher rate – a practice called arbitrage – will be felt in earnest in the coming week.

"The CBK have started to exercise greater vigilance around the discount window. The collapse of the shilling was driven by the flood of shilling liquidity that was made available at the (discount) window" said Alykhan Satchu, an independent investment analyst.

"Therefore, the recent throttling back of liquidity is helping the shilling find some purchase."

In a raft of actions to save the shilling after a public outcry on the weakening trend, CBK also suspended the operations of the Central Bank Rate – the rate it lends banks as a lender of last resort – and instead came up with a Discount Window that that is monitored on a daily basis.

There was also a strong warning to traders who engaged in excessive speculation and arbitrage.

Shilling liquidity

Traders say liquidity – the free flow of the shilling in the economy –tightened after the Central Bank came with the directives with a general bias in the market for a stronger shilling now evident.

Tight shilling liquidity in the market makes it expensive to fund long dollar positions with more and more traders trimming down the amounts of dollars at their disposal.

Analysts say that the current scenario is as a result of the new measures that are more responsive to market operations after the CBK decided to make Central Bank Rates a daily rate as opposed to previous practice where it was monitored only once in two months.

Signs of things to come started being felt on Thursday when the shilling gave indications of gaining against the dollar yesterday although heavy demand for the dollar by oil importers – who are in the process of bringing in the precious commodity– played down the strengthening of the local currency.

On average projections indicate that the shilling will weaver between the 88 to 89 to the dollar mark in the coming weeks with chances of strengthening even further will the anticipated inflows from tea, horticulture and non-governmental organisations.