CBK moves to stabilise shilling after Trump’s surprise victory

Donald Trump’s surprise victory in the US presidential election Wednesday reverberated across the world, causing exchange rate volatility in key markets that saw the Central Bank of Kenya (CBK) promise currency traders support in the event of a speculative attack on the shilling.

A currency trader at one of the local banks told Reuters that a central bank official had called dealing rooms to indicate that there would be support “should there arise a need to do so.”

The CBK’s show of readiness to deploy its substantial foreign exchange reserves in the market was meant to forestall speculative trading on the shilling in reaction to news that other world
currencies were experiencing volatility against the dollar following Mr Trump’s election as the 45th US President.

The Kenyan shilling, however, remained relatively stable during Wednesday’s trading – standing at an average of 101.70/80 by early afternoon, only slightly changed from Tuesday’s closing rate of 101.70/85.

“There is no reaction yet, and we think that the awareness that CBK has the necessary reserves offers some degree of protection against any speculative trading,” said a dealer at another bank, adding that investors had adopted a wait and see attitude in the lead-up to the US polls, refraining from taking extreme positions.

The CBK’s action was in line with its response to market volatility that followed the UK’s June vote to exit the European Union, which was stabilised through market intervention.

Though the CBK refused to speak on the subject, Kenya’s foreign currency reserves declined by a whopping Sh28 billion ($280 million) in one week in what dealers said was partly the result of aggressive dollar sales in the market.

Central Bank intervenes in a volatile market through sale or purchase of dollars, mopping up or injecting shilling liquidity, depending on the direction of movement of the currency.

A rapidly depreciating shilling would see the regulator pump dollars into the market, while movement in the opposite direction would lead to a withdrawal of liquidity from the market.

The CBK, which has maintained it does not seek to determine the direction or level of exchange rate, had not responded to our queries on actions it intended to take in the event of currency market volatility.

Kenya currently has $7.63 billion (Sh776 billion) worth of foreign exchange reserves, equivalent to 5.09 months of import cover and above the four months minimum import cover it is required to maintain.

Shrugged off negativity

There was calm in the equities market, where the NSE shrugged off the negativity surrounding the US election and the market’s 20 share index closed the day four points lower at 3,238 points – better than Tuesday’s six point drop.

The fears over currency instability were partly driven by reactions in the international markets where the euro and sterling pound made significant gains against the dollar in early trading as uncertainty over Mr Trump’s economic policies such a likely protectionism of the US economy sank in.

Local analysts, however, said that the shilling was more likely to rely on its recent stability to stave off volatility, even as they expected emerging markets to experience some capital flight as investors look for safety in US bonds market.

“I think Kenya is a safe haven. The shilling has been one of the least volatile currencies anywhere in the world in 2016, especially when you compare it with sub-Saharan Africa peers,” said Aly Khan Satchu, the CEO of investment advisory firm Rich Management.

Mr Satchu said he expects domestic factors to play a bigger role in how the shilling behaves going forward – citing Kenya’s own elections next August as one such event.

This year, the shilling has appreciated by 0.6 per cent to the dollar, in comparison to the Uganda shilling that is down by 3.6 per cent and the Tanzania shilling, which shed 1.5 per cent of its value to the dollar.

A higher risk lies on the macro-economic side, especially in trade where Mr Trump has promised to renegotiate nearly all trade deals the US has with various countries and trading blocs around the world.

“We might see the African Growth and Opportunity Act (AGOA) diluted and what was a serious US engagement with Africa slow down,” said Mr Satchu.

This would have longer term repercussions on currencies, including the shilling, while the promised tougher immigration rules in the US would possibly affect growth in diaspora remittances that have provided a sizeable share of forex inflows for Kenya and other African countries.

“Another area for concern for emerging/frontier economies under a Trump win is that it will put greater long-term pressure on immigration to and remittance growth from the US,” said UK based investment bank Exotix Partners in a brief following the US election.

Kenyans abroad sent home Sh86.2 billion in the six months to June, compared to Sh75.3 billion in the first half of 2015, with the growth mainly coming from the US where the economy has been performing better compared to Europe.

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