The Kenyan shilling appreciated by 0.3 percent against the US dollar to 109.7 shillings, from 109.8 shillings recorded the previous week.
The slight appreciation was mainly attributable to market participants anticipating a positive economic recovery from the coronavirus crisis coupled with the arrival of vaccines in the country during the week.
“On a YTD basis, the shilling has depreciated by 0.4 percent against the dollar, in comparison to the 7.7 percent depreciation recorded in 2020,” said Cytonn Investments in a statement.
Pressure on the shilling is expected to come from the slowdown in foreign dollar currency inflows due to reduced dollar inflows from sectors such as tourism and horticulture.
Pressure will also continue coming from the continued uncertainty globally making people prefer holding dollars and other hard currencies.
Support for the local currency will come from the Forex reserves which are currently at USD 7.4 billion, 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.
The improving current account position 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 an improving diaspora remittance 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.
Rates in the fixed income market have remained relatively stable but we have seen an upward trend in the short end due to increased borrowing by the government.
The liquidity in the money market, coupled with the discipline by the Central Bank as they reject expensive bids has continued to check the rate of the rates increasing. The government is 13.1% behind its prorated borrowing target of Kshs 374.5 bn having borrowed Kshs 325.3 bn.
‘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 their report.
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