The shilling weakened to a two-and-a-half-month low of Sh129.58 against the dollar on Friday as per the official exchange rate printed by the Central Bank of Kenya (CBK), with traders saying pressure came from increased demand for the US currency from consumer goods importers.
The shilling has been locked in a prolonged period of stability against the dollar due to muted demand from importers in a tough economy, and support from agriculture exports and diaspora remittance inflows.
Despite Friday’s depreciation, it remains within the Sh129 level versus the dollar where it has stayed since August last year, even though traders expect that it might break out above this level if the demand from goods importers persists into the coming week.
Foreign bond investors also bought dollars from the market after their share of proceeds from the bond buyback that the Treasury concluded on Monday, and whose payment was done on Wednesday.
“Foreign investors who participated in the Treasury bonds buyback were also seeking dollars from the market to repatriate their cash,” a forex trader in a commercial bank said.
The dip in the exchange rate also came a day after Treasury Principal Secretary Chris Kiptoo attributed the shilling’s recent stability to the CBK buying dollars from the market, saying that without these purchases the exchange rate would have likely appreciated to as high as Sh100 against the dollar in recent weeks.
By buying dollars from the market, the CBK seeks to ward off volatility on the gain side, preventing the shilling from appreciating too fast against the dollar. When the volatility is on the weakening side, the CBK sells dollars to the market.
The CBK has however maintained in past statements that it does not seek to influence the direction or position of the shilling’s exchange rate through its open market operations.
The recent stability of the exchange rate that has seen the shilling range bound between Sh128 and Sh130 started in June last year.
Before that, the shilling appreciated sharply from an all-time low of Sh161 to the dollar in February, helped by the successful partial buyback of the country’s debut 2014 Eurobond that was due to mature in June 2024.
Investors were concerned that Kenya would not be able to make the $2 billion (Sh259.16billion) bullet repayment on the repayment successfully. Bond successfully when it came due, given that official forex reserves were at the time lower than the preferred minimum of four months’ worth of import cover.
External borrowing conditions were also unfriendly to smaller economies like Kenya due to the prevailing high interest rates in the US, which led lenders to demand a high premium to lend to riskier economies.
The Eurobond was however successfully refinanced through a partial buyback of $1.5 billion (Sh194.37billion) worth of notes, which was funded through a fresh issuance in February. The balance was repaid as scheduled in June using proceeds of a World Bank loan.
