Taking a hit: Markets lose their mojo as shilling gains

The value of interbank trading alone declined by Sh2.7b
There was a slowdown in trading activities last week, even as the exchange rate stabilised, according to a weekly bulletin from Central Bank of Kenya (CBK).

Over the week, trading in both the money and capital markets declined significantly, developments that helped the shilling gain some ground against the US dollar.

According to CBK, the value of interbank trading declined by Sh2.7 billion from Sh8.9 billion to Sh6.2 billion, a situation that might have had a knock-on effect on the other markets.

Trading in equities and bonds, on the other hand, also fell during the week under review. And with less of the local currency leaving CBK reserves into bank accounts to be used for various commercial activities, the shilling strengthened.

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“The Kenya shilling strengthened against major international and regional currencies, amidst reduced volatility, during the week ending August 8,” noted CBK in the bulletin.

At the same time, all the equity market indicators declined during the week under review as activities at the Nairobi Securities Exchange (NSE) became muted.

The biggest loser was the NSE 20-Share Index, the benchmark index, which declined by 2.4 per cent, with investors shedding billions in paper wealth. The All Share Index, NASI, declined by 0.8 per cent while the NSE-25 Index dipped by 0.5 per cent.

Yields on the Government’s short-term securities (Treasury Bills) also declined, a reflection of depressed demand for the assets as the supply of money declined. “Trading activity in the domestic secondary bond market declined by 42.2 per cent during the week ending August 8,” noted CBK.

It was the same with the international market, with yields on Kenya’s seven-year, 10-year (2024) and 10-year (2028) Eurobonds declining by 2.7 per cent, 3.3 per cent and 3.5 per cent basis points.

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New derivatives market, however, did well. The number of futures contracts settled on the bourse increased to 43, valued at Sh1.2 million  compared with 32 contracts valued at Sh0.9 million in the previous week.

The issue of whether or not CBK has been mopping up excess liquidity has divided financial experts. While some insist that there are tell-tale signs of the financial regulator tightening liquidity through open market operations, others counter that by retaining the Central Bank Rate (CBR) at nine per cent, CBK has indicated that it is not willing to suck up excess liquidity.

By the end of May, banks reserve at CBK - the minimum fraction of commercial banks’ deposits required to be stashed at the apex bank - increased by Sh32.6 billion, or 12 per cent,  to Sh263.6 billion from Sh231 billion in April. While these are the latest bank reserve figures, some analysts have interpreted them as one of the signals of tightening liquidity, especially after the National Treasury paid suppliers, leaving the economy awash with disposable income.

“In addition to the payments we have made so far, we have prioritised payment of Sh10.9 billion of the verified pending bills which will be paid before the end of this month,” said suspended Treasury Cabinet Secretary Henry Rotich in his budget statement in June.

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Central Bank of KenyaNairobi Securities ExchangeKenyan shilling