Shilling Supported by Increased Dollar Inflows Coupled with Subdued Greenback Demand.

The local unit gained against a number of select international and regional currencies in the course of the week.  The shilling ranged in the 102.52-102.65 band against the US dollar in the course of the week. The local unit has been supported by increased dollar inflows coupled with subdued greenback demand. US February non-farm payroll data released on Friday was better-than-expected at 235,000 whereas unemployment rate was mute at 4.70%. The double labour statistics data, which have been positive since December, are likely to anchor the expected Federal Reserve rate hike decision on Wednesday.

Market moving data released on Friday showed that February non-farm payroll data coming in at 235,000, against an expected 200,000, cementing the notable pick up recorded in January. Unemployment rate indicated stability at 4.70%. We opine that the labor data will provide fuel in the anticipated US Federal Open Market Committee rate increase mid next week. Across the pond, the local unit posted mixed performance, gaining 1.01% against the dollar and retreating 0.58% against the Euro currency. The pound was depressed on account of economic releases in the week pointed towards sluggish spending amongst consumers. United Kingdom is also keenly watched ahead of trigger of Article 50 which will formally chart the way for the nation exit from European Union. On the regional front, the shilling gained 1.02% and a marginal 0.17% against the South African rand and Ugandan shilling (respectively).

The rand was weighed down by a global emerging market currencies sell-off in the week on account of stellar US economic data.

Foreign exchange reserves at CBK increased by USD 33Mn (KES 3.39Bn) in the week, to USD 7.03Bn (KES 720.66Bn), equivalent to 4.64 months of import cover.

Equities

Secondary market turnover improved by 18.10% in the week to clock KES 10.47Bn. Trading activity was heavy on the long end papers – majorly the 20-year tenor – by insurance companies and fund managers with 60.48% centered on five bonds. Mismatch has been salient on the short end as a dearth in supply has not bridged the high demand (largely coming from banks). The demand pressure – on the short end- has been attributed to investors reducing their duration due to uncertainties surrounding short term interest rate direction. We believe this is what prompted the Central Bank to issue a 1.65-year and 2.23-year bond for the month of March to match this demand. Activity was balanced between the Treasuries and infrastructure bonds; trading on the latter on account of opportunities in the wake of the 46.83% total performance of the February bond issue.

Prime Rates

Yields on the 91-day and 364-day tenors edged up 5.80% and 0.60% (respectively). We view there are upward pressures on the 91-day as it still issuing negative real yields with latest inflation figures elevated by 35 basis points. Overall performance on the two tenors was at 123.00% in the auction. Subscription in the 364-day overwhelmed, reversing the sub-performance trend in the last two auctions. We expect the tenors to continue showing improved performance in the coming auction, with the CBK eliminating the 182-day paper on account of concentration risk.