Shilling slightly weaker against dollar, Central Bank action eyed

The shilling yesterday eased slightly against the US dollar in early trade, with traders expecting the central bank to sell dollars to prop up the currency if it weakens further.

When currency markets opened yesterday, commercial banks were posting the Shilling at 90.30 buying and 90.40 selling amid thin volumes, weaker than Friday's close of Sh90.25 buying and Sh90.35 selling against the dollar. "It's been quiet. But if the shilling goes up to 90.50, we expect the central bank to come in and intervene," said John Njenga, a trader at Commercial Bank of Africa.

The local currency has weakened 4.8 per cent against the dollar this year despite frequent interventions by the central bank to prop it up, including dollar sales. Central bank said it was in the money market on Monday to mop up Sh7 billion in excess liquidity using repurchase agreements and term auction deposits.

By absorbing excess liquidity, the bank makes it more expensive to hold long dollar positions, which supports the shilling. Traders said the bank sold dollars last Wednesday to defend the local currency when the shilling neared the 90.50 level. Njenga said the shilling may receive some support this week from companies which are closing down ahead of the Christmas holidays or paying pre-Christmas bonuses to employees. "They will be paying in the middle of the month, so we expect them to convert (dollars into shillings) which may offer support to the shilling," he said.

Analysts also say while short term volatility on the Kenya Shilling was expected, additional funds from the tap sale on the Euro bond coupled with interventions from the regulator should cushion the currency from adverse movements.

However, a bulletin from Standard Investment Bank (SIB) has downplayed just how badly the local currency is doing. Over the last four months, the Kenya currency has lost 2.6 per cent to the US dollar and 3.5 per cent over the last one year. "We compared various East African currencies and found that the Shilling has held up reasonably well," it stated.