Shilling stable despite slide for third day

By Morris Aron

The shilling slid for the third day in a row against the dollar as commercial banks moved to stock up foreign currency to hedge against any foreign exchange risks that may unfold as the New Yearapproaches — especially with the continued weakening of the euro.By Morris Aron

The local unit yesterday lost nearly one per cent against the dollar — the biggest intraday fall in two months — to trade at Sh84/90 and Sh85/10 range.

This week alone, the shilling has lost 1.5 per cent, although it remains well above a record low of 107 in October before an aggressive tightening of monetary policy.

Dealers said the current exchange rates are a reflection of banks squaring positions in readiness for next year, increased demand for the dollar from the oil sector and leveling off effect from inflows from the tea sector.

"Banks are squaring positions ahead of the new year," said Sameer Lagadia, head of trading at Diamond Trust Bank.

"There was also a weakening of the euro affected by poor liquidity towards the year-end in the Eurozone." Kennedy Butiko, deputy head of trading at Bank of Africa said the market was thin — meaning there was limited trading and short supply of foreign currencies, leading to exaggerated moves on small order, after some interbank greenback purchases.

Buy, sell positions

The term "square position" denotes that the positions of the currency dealer are offsetting — the buy positions of the dealer are equal to the sell positions Market players expected the shilling to remain broadly steady against the dollar as the year draws to a close, even though maturing government securities appeared to ease the tight liquidity in the money market.

"There was a bit of demand mainly from the interbank market," said Ignatius Chicha, head of markets at Citibank.

According to Duncan Kinuthia, a trader at Commercial Bank of Africa, the extra liquidity as a result of the maturity of government securities would most likely not affect the shilling’s level as corporate clients have largely remained out of the market being a period of festivities.

The shilling exchange rate trend comes even as the country recorded the first drop in inflation trends after a 15-month of consecutive rise.

The Central Bank of Kenya was in the recent months forced to put in place punitive monetary policy measures to tame liquidity and extreme foreign exchange volatility after the local unit broke an all time record against the dollar.

The move — which has significantly tamed foreign exchange volatility and is currently addressing inflation — included the raising of a key lending rate that signals interest rates that commercial banks’ charge to consumers.

The CBK raised its CBR — the rate at which commercial banks borrow from the CBK as a lender of the last resort — to 18 per cent and adjust a move that pushed interest rates to trends last witnessed in the 90s.