CBK’s Mop-ups, Diaspora Inflows Shore Up Shilling

The massive official support means the currency exchange remains artificial. Photo/FILE

The massive official support means the currency exchange remains artificial. Photo/FILE

Central Bank of Kenya’s (CBK) mop up of excess liquidity, inflows from tea earnings and diaspora remittances shored up the shilling in April, keeping it trading below the 87 level.

However, the local currency exchanged at between 86.75 and 90 units to the dollar during Friday trading, replicating the range throughout the week as CBK listed the shilling at a mean exchange rate of 86.86.

A shorter four-day week courtesy of the Labour Day holiday helped reduce activity though. Investors and banks normally square their dollar positions ahead of market interruptions.

Currency traders said that CBK’s intervention and external support have eased pressure on the shilling to spare the currency the forces buffeting some African currencies.

“The shilling gained a bit guided by some positive market variables,” said Peter Mutuku from Bank of Africa’s currency department.

Traders said inflows only in part continue to bulwark the currency against fundamentals that clearly point to weakening of the shilling.

“Inflows have been minimal hence the intervention by the regulator through reverse repos. If CBK was to keep off the market, we would have seen the shilling touch a rate of 88 to the dollar,” said Robert Gatobu of Bank of Africa treasury.

CBK was again in the market for at least Sh15 billion on Tuesday and Sh10 billion last Wednesday.

This is despite the fact that toward the end of the month, dollar demand mainly from the energy sector normally overtakes inflows as importers seek the greenback to settle their accounts. The effect of this demand has been less than normally expected lately, thus boosting the shilling further.

“Tea auction inflows on Tuesday largely matched the demand for dollars. The expected retention of the base rate by CBK has also been factored in by the market, and we expect the local unit to be stable into next week,” said Family Bank treasury manager Joseph Gathege.

In April remittances from the Diaspora saw the CBK’s foreign exchange reserves increase to $6.339 billion from $6.213 billion in March. Analysts said the inflows leveraged the CBK’s mop up.

“The buildup in reserves largely reflected the sale of foreign exchange to CBK by commercial banks,” said analysts at Standard Investment Bank.

During the early part of this month some traders still expect a slight strengthening of the shilling to around the 86.50 to 86.80 range as much of the demand fizzles out though.

However the massive official support means the currency exchange remains artificial. CBK statistics show that it mopped up close to Sh110 billion worth of excess liquidity through repos and term auction deposits from the market from the beginning of March to the end of last week.

The increased activity in the forex market by CBK has come at a time of reduced tourism inflows due to security fears.

Tea auction prices have averaged $2.36 (Sh200) per kilogramme since the beginning of 2014, compared to $3.02 (Sh260) in a similar period last year to put the shilling under pressure.

This has been countered in part by appetite for government debt in the market, which has helped bring in more dollars from offshore investors.

Out of the Sh24 billion worth of bonds and bills on offer last week, bids worth Sh40.5 billion were received, with the government accepting Sh26.7 billion.

Import cover has also remained stable in the past two months at between 4.32 and 4.37 months at $6.3 billion, above the required four-month cover.

– Business Daily