Inflation Cools Off in August

Inflation Cools Off in August

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%. Nonetheless, August inflation tapered to 5.84% from 6.62% the previous month. The month on month parameter was supported by a 0.21% decrease in consumer prices as food and non-alcoholic prices declined by 0.26%, as a result of better weather conditions. Even so, pressures culminating from the depreciation of the local exchange rate are likely to add pressure on consumer prices in the coming months.

KES Submerges Amid External Pressures & Internal Weakness

Growing internal pressures from a worsening current account deficit, improving liquidity in the money market and steady strengthening of the USD globally from a prospective rate hike are the number of factors which are likely to weigh on the KES going forward. The prospects for the USDKES like any other emerging currency are pegged on the much anticipated FOMC statement due to be released at the end of the week. A steady growth in job numbers and retail sales seconds an interest rate hike by the Federal Reserve. Having reviewed the current market conditions, we portend USDKES exchange rate to trade within the range of 105.40-107.50, as speculative trading and cyclical month end dollar demand may weigh down on the KES in the coming weeks.

Tight Liquidity Conditions Expected

We have observed a relatively liquid money market since the beginning of September which has garnered support from government payments and the maturities of government securities. The second half of September overlooks a significant level of maturing government securities which is likely to keep the money market liquid; however, we expect the monetary regulator continue offering TADs and REPOs to turnover maturing (Open Market Operations) OMO instruments whilst supporting the KES. On the other hand, bond maturities in October are expected to dip and this may tighten liquidity conditions in the money market once again.

Yields On Treasuries Expected To Trade With Upward Bias

We portend that yields on treasury bills will continue to display an upward bias in light of prospective tightening of monetary policy, following the release of the FOMC statement at the end of the week. The offer of the 1 year bond next week is likely to push the yield on the 364-day paper upwards. Nonetheless, we expect investors to retain a cautious trading attitude despite improving liquidity in the money market, due to prevalent uncertainty in the fixed income market.

Steady Yield Curve with an Upward Bias on the Short End

Yields particularly on the short end of the yield curve ascended, as market participants aggressively bid for higher rates for the 2 year paper. This has resulted in a skewed yield curve where the yield on the 2-Year paper is pegged significantly higher than the treasuries. The uptick was mainly attributed to tight liquidity in the money market at the start of the month. Furthermore, subdued trading levels in the secondary market placed further upward pressure on yields. Going forward, we expect yields to hold steady with an upward bias on the short end of the curve. Trading levels in the secondary market are expected to remain mellow for the remaining part of the month as liquidity in the money market tightens. We portend investors’ appetite to be skewed towards the short end of the yield curve.

Treasury Offers 1 Year Bond Note In September

The Treasury is set to auction the FXD1/2015/1 on the 24th September 2015. With the debt issue the Treasury is seeking to raise KES 30 billion. The re-opening of the 1-Year will cater for investors seeking to invest in the short segment of the market and will boost the outstanding volume and liquidity to support secondary trading and reducing bond fragmentation.