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Central Bank defends shilling as demand for dollar increases

By Jackson Okoth and Reuters | September 23rd 2014

Kenya: All eyes will be on the next Monetary Policy Committee (MPC) to see what actions Central Bank of Kenya (CBK) will take to defend the shilling. With the shilling weakening against other hard currencies, exporters will have a problem getting their products to the European Union - the country's main export market.

When markets opened yesterday, the shilling was quoted at 88.70/80 to the dollar, compared to Friday's close of 88.50/60. In the last one month, the shilling has traded at between Sh87.50 and 88.50 to the dollar.

"Central Bank of Kenya has not been aggressive in defending the shilling at any position, an indication that it is comfortable and has enough reserves to defend the local unit against any major shocks," said Eric Musau, an analysts at Standard Investment Bank(SIB).

Last week, the banking sector regulator announced that its foreign exchange reserves had shot up from $6.3 billion (4.13 months of import cover) as at end of August, 2014 to $7.4 billion.

"This announcement has brought some calm to the forex market. End of month importer demand should take the shilling back to the 89.00 level. But any movement above the 89 level should see CBK coming in again," said Julius Kiriinya, a senior dealer at African Banking Corporation (Kenya).

He adds that the Central Bank of Kenya is keen to protect this level as importer demand comes through. CBK has over the last three weeks accumulated over $1.1 billion, largely originating from the sale of sovereign bond proceeds by Government.

"The current level of import cover is the largest that CBK has ever attained. It is therefore clear that the current level of foreign exchange reserves is not only adequate to meet any unforeseen market developments but it also confirms that inflows into the foreign exchange market have continued," said the CBK statement.

A downturn in the tourism industry, after a spate of bomb and gun attacks along the Coast and in the capital this year, has hurt one of East Africa's major sources of hard currency.

According to Nahashon Mungai, a foreign exchange trader at Kenya Commercial Bank, there definitely has been pressure on the shilling in the last couple of days, adding, "Central Bank of Kenya's intervention has propped it up pretty well. However, "It looks like the shilling is losing a bit of strength again this morning."

Another dealer at a Nairobi-based commercial bank also noted the modest weakening but said the market was relatively quiet in early business. Another dealer at a Nairobi-based commercial bank also noted the modest weakening but said the market was relatively quiet in early business.


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