Investor portfolio inflows coupled with exporter inflows offset corporate demand for the dollar powering the Kenyan shilling to an 11-month high on Tuesday. According to data, the shilling touched 102.45 to the dollar in early trading, the highest level since March 2017. It later settled at an average of 102.60/80 in mid-afternoon closing at closed at 102.50/95 on Monday.
This is cause for relief as a stronger shilling could ease exchange rates costs for importers which will filter down in the form of lower cost of goods for consumers. However, it remains to be seen whether the gains will hold over the next few weeks.
Exporters could on the other hand feel the pinch as their dollar earnings translate into fewer shillings on conversion. Currency traders attributed the strengthening of the shilling in the past week to dollar inflows from foreign investors chasing the Sh40 billion January infrastructure bond, which comes with an attractive tax-free coupon of 12.5 percent. Sale of the bond closed on Tuesday.
“In the past week or so we have seen some strengthening, because of a lot of inflows from exporters and some of the investors who want to benefit from the infrastructure bond. This has had the impact of strengthening the currency,” said Central Bank of Kenya governor Patrick Njoroge during a briefing on Tuesday.
Dr Njoroge, however, added that the CBK will keep an eye on the market to iron out any volatility – a mandate it executes by selling dollars to the market in case of irregular strengthening or buying dollars if the shilling shows rapid slide.
The Kenyan currency has also gained from tight liquidity in the money market, which has seen some of the lenders reduce their dollar holdings as they build up their local currency position.
The shilling opened the year at an average of 103.30 units to the dollar, meaning that it has gained 0.6 percent in the last three weeks. A US government shutdown over the weekend also raised concerns in global markets leading gain in strength of major currencies including the shilling.
On Tuesday, the US House of Representatives agreed and passed a short-term measure to fund the federal government through February 8, ending a three-day government shutdown. The deal, however, did little to spur up the dollar among other major currencies.
Going forward, analysts expect that the shilling will continue to be range bound against the dollar, especially if higher oil prices keep pushing up the import bill and the US keeps raising their interest rates which tends to strengthen the dollar globally.
NIC Securities sees the dollar holding at a tighter range of 102-103 for the year. In their firm’s macroeconomic outlook for the year, Analysts at Dyer & Blair Investment Bank predict that the shilling could slide to the 104-105 level by the third quarter of the year.