Shilling Appreciates Against The Dollar After Many Days

Last week, the Kenyan shilling appreciated against the US dollar by 2.5 percent to 108.8 shillings from 111.6 shillings after many days of being under fire from the US Dollar.

According to a report by Cytonn, the appreciation is partly attributable to the easing of the US dollar against other world currencies falling and also the support activity by the Central Bank.

On a YTD basis, the shilling has depreciated by 7.4 percent against the dollar, in comparison to the 0.5 percent appreciation in 2019.

The shilling will, however, continue being under pressure due to the demand from merchandise traders as they beef up their hard currency positions ahead of the festive season, amid a slowdown in foreign dollar currency inflows.

Pressure on the local currency also continues to come from the continued uncertainty globally making people prefer holding dollars and other hard currencies.

Support for the shilling will come from the Forex reserves which are currently at USD 7.8 bn which is above the statutory requirement of maintaining at least 4.0-months of import cover, and the EAC region’s convergence criteria of 4.5-months of import cover.

There is also the improving diaspora remittances evidenced by a 17.3 percent y/y increase to USD 263.1 mn in October 2020, from USD 224.3 mn recorded over the same period in 2019, has cushioned the shilling against further depreciation,

Rates in the fixed income market have remained relatively stable due to the high liquidity in the money markets, coupled with the discipline by the Central Bank as they reject expensive bids.

The government is 39.3 percent ahead of its prorated borrowing target of 215.1 billion shillings having borrowed 299.5 billion shillings.

“Owing to this uncertain environment, our view is that investors should be biased towards short-term to medium-term fixed income securities to reduce duration risk,” said Cytonn in a report.

READ: Kenyan Shilling Hits Its Lowest Last Week Of November