The Kenya Shilling appreciated against the US Dollar by 1.3 percent during the week to close at 108.0 shillings from 109.4 shillings.
The Kenya Shilling appreciated against the US Dollar by 1.3 percent during the week to close at 108.0 shillings from 109.4 shillings recorded the previous week.
The performance of the local currency was attributable to muted importer dollar demand amid increased inflows from offshore investors into the recently issued infrastructure bond.
The shilling has appreciated by 1.1 percent against the dollar on a YTD basis in comparison to the 7.7 percent depreciation recorded in 2020.
Pressure on the shilling will continue coming from the rising uncertainties in the global market due to the Coronavirus pandemic, which has seen investors continue to prefer holding their investments in dollars and other hard currencies and commodities.
The continued strengthening of the US Dollar against major currencies, evidenced by a YTD gain of 2.4 percent in the ICE U.S. Dollar Index as compared to a 6.7 percent decline in 2020 will pile pressure on the shilling.
The ICE U.S. Dollar Index is a benchmark index that measures the international value of the US Dollar. Investors can monitor the value of the US Dollar relative to a basket of six other world currencies.
The shilling will be supported by the Forex reserves, currently at USD 7.4 bn (equivalent to 4.6-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.
The Forex reserves have been declining and this may mean that the government of Kenya will struggle to support the local currency when it depreciates,
Support for the shilling will also come from 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.
The improving diaspora remittances evidenced by an 18.9% y/y increase to USD 260.3 mn in February 2021, from USD 219.0 mn recorded over the same period in 2020, have cushioned the shilling against further depreciation.