During the week, the Kenyan shilling appreciated by 0.4 percent against the US dollar to 109.5 shillings, from 109.8 recorded the previous week.
The slight appreciation was mainly attributable to a subdued dollar demand, inflows from the agriculture sector, and banks offloading their long dollar positions.
On a YTD basis, the shilling has depreciated by 0.3 percent against the dollar, in comparison to the 7.7 percent depreciation recorded in 2020.
Pressure on the local currency will continue coming from the demand from merchandise traders as they beef up their hard currency positions.
There is also a slowdown in foreign dollar currency inflows due to reduced dollar inflows from sectors such as tourism and horticulture, piling pressure on the shilling.
The continued uncertainty globally making people prefer holding dollars and other hard currencies will hit hard on the shilling in the short-term.
Support for the shilling will come from the Forex reserves which are currently at USD 7.6 bn (equivalent to 4.7-months of import cover), 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.
Currently, there is the improving current account position which narrowed to 4.8 percent of GDP in the 12 months to December 2020 compared to 5.8 percent of GDP during a similar period in 2019.
There is also the improving diaspora remittances evidenced by a 19.7 percent y/y increase to USD 299.6 mn in December 2020, from USD 250.3 mn recorded over the same period in 2019, has cushioned the shilling against further depreciation.