Tight Liquidity Dampens Trading In Secondary Market
Liquidity was particularly tight by the fourth week of June as commercial banks paid taxes to the CBK and the monetary regulator issued OMO (Open Market Operations) securities to manage further exchange rate volatility. A sum of KES 52.8 billion worth REPOs and TADs were issued during the month relative to KES 31.2 billion issued in the previous month, consequently, the interbank rate rose to an average of 12.03% in the week ending 26th June 2015. Tight liquidity has continued to dampen secondary market trading levels and resulted in lower subscription levels during weekly Treasury bill auctions.
We have observed a relatively liquid money market since the beginning of July which garnered support from government payments as well as maturities of TADs; however, we expect the regulator to keep a tight grip on liquidity in order to augment the Kenyan Shilling exchange rate. We portend restricted conditions in the money market for the second half of July as there are no Treasury bond redemptions. Liquidity conditions may improve marginally in the first half of August supported by a larger number of redemptions of government securities.
MPC Raises CBR To 11.50% In Light Of Inflationary Pressures
The MPC revised its CBR rate upwards for a second consecutive month as it noted elevated risks to the inflation outlook mainly due to pressures deriving from exchange rate volatility. The CBR rate was revised by a 100 bps to 11.50%. Month on Month inflation rose to 7.03% in June from 6.87% in May, indicating a rise in fuel prices, a spill over effect from weakening of the KES against the USD and moderate demand pressures. Similarly, Non-Food Non- Fuel inflation also increased to 4.6% from 4.2% during the same period, reflecting underlying inflation pressures.
KES Deepens Losses Against International Peers
The USDKES exchange rate shed 0.67% over the month and breached the 100 level in the beginning of July despite persistent interventions by the CBK to mitigate further slides. Furthermore, the KES shed 3.91% and 3.15% against the Sterling Pound (GBP) and Euro (EUR), respectively during the same period. Significant demand for foreign currency has been one of the major internal factors for currency volatility as retailers hold cautious sentiments, therefore reacting by increasing their stock of foreign exchange in hindsight of further volatility. Meanwhile, exports of tea and coffee have declined over the last six months, with inflows from our traditional foreign exchange earners not being sufficient to meet demand.
The dollar has extended a further upward global rally against all major currencies, especially with the ongoing Greek debacle and is expected to remain strong as it rallies on the back of strong economic data. Similarly, we expect the Sterling Pound to continue strengthening as economic fundamentals fuel optimism. We portend USDKES exchange rate to trade within the range of 101-104.50 as speculative trading as well as month end dollar demand may weigh down on the exchange rate.
Treasury Bond Yields To Follow Upward Trajectory
Yields displayed an upward trend particularly on the short and medium term segments. The uptick was mainly attributed to tight liquidity in the money market as well a cautious nature among investors which resulted in subdued trading levels in the secondary market. Meagre investor sentiments as well as subdued trading levels in the secondary market are likely to place further upward pressure on yields across the board. We may observe greater preference for short term notes particularly treasuries as the yields align to the new CBR rate. Volatility in the Kenyan exchange rate is also further dampening sentiments, therefore we expect investors to remain cautious whilst trading on the secondary market; and are likely to lean towards the short end. Consequently, we retain a forecast for a flatter yield curve.
Treasury To Re-open 5 Year Bond Note in July
The Treasury is scheduled to re-open its first 5 year note which will be auctioned on the 21st of July 2015 at a coupon rate of 13.193%. With the debt issue the Treasury is seeking to raise KES 15 billion. The re-opening of the 5-Year will cater for investors seeking to invest in the short to medium segments of the market and will boost the outstanding volume and liquidity to support secondary trading and reducing bond fragmentation.