Liquid market piles pressure on shilling as dollar soars
What you need to know:
- In last week’s Treasury bills auction, investors offered a massive Sh62.3 billion against the Sh24 billion the Treasury was seeking thought three tenors of bills.
- Central Bank accepted only Sh18.3 billion, effectively sending back over Sh43 billion into a market that currently has few alternative investment options.
The shilling last week came under pressure against the dollar as high liquidity in the market cut the demand that had been propping it up the previous week.
By close of trading on Thursday ahead of the Eid-ul-Fitr holiday, the it was exchanging at an average of 101.10 to the dollar, compared to Monday’s opening rate of 100.85.
The market is currently experiencing high liquidity, with the government showing little appetite for absorbing these funds through securities auction, having achieved its domestic borrowing target for the fiscal year ending June 30.
Hard and soft currencies
The green back is also on a rally against most hard and soft currencies with newswire Reuters reporting “a clutch of currencies were on track for their worst week in years”.
“The shilling continued to come under pressure closing at 101.10 as the dollar continued to rally globally. This creates slight unease heading into the close of the financial year,” said Genghis Capital in a market note on Thursday.
“We are about to enter into the budget cycle where rates come under pressure as government spending halts pending the new budget. In such an environment a shilling under pressure only exacerbates the situation,” said Genghis Capital in a market note on Thursday.
In last week’s Treasury bills auction, investors offered a massive Sh62.3 billion against the Sh24 billion the Treasury was seeking thought three tenors of bills.
Central Bank accepted only Sh18.3 billion, effectively sending back over Sh43 billion into a market that currently has few alternative investment options.
Interbank rate
The high liquidity is also reflecting in the interbank rate — at which banks borrow from each other on emergency basis to fulfil their statutory daily cash requirements— pushing it down to the 3.3 to 3.8 per cent range last week, from five per cent at the beginning of the month.
At the same time, analysts at Commercial Bank of Africa said there was reduced trading activity in the market as it wound down to Friday’s holiday. The resultant reduced demand for dollars would have helped stabilise the shilling and reduce further erosion.
This week, attention will turn to central bank to see whether it will intervene by mopping up excess liquidity.
