Focus on Central Bank of Kenya as shilling continues to slide against dollar

By Charles Mwaniki | Business Daily, Kenya January 11, 2017

The Central Bank of Kenya (CBK) was Tuesday thrust into the limelight as the shilling continued its slide against the US dollar, touching 104 units to the greenback as turbulent trading that began last week persisted.

The market is particularly waiting to see how far the CBK is willing to go in support of the shilling after last week’s response in which it attempted to stabilise the currency through market operations.

While traders have attributed the depreciation to heavy dollar demand from importers — especially in the oil sector — the regulator appeared to blame speculators for the turbulence.

Bloomberg, a news syndication service, Tuesday reported that the CBK had stopped forex traders from making comments “that can influence the currency to decline outside of normal market fundamentals,” taken to mean speculation.

The CBK had not responded to questions on the matter by the time of going to press. Traders, however, said that CBK had sold dollars in the market to stem volatility that has seen the shilling shed 1.3 per cent of its value since the beginning of the year.

Commercial banks yesterday quoted the shilling at 103.90/104.10 to the dollar, compared to 103.90/104.00 on Monday, while the CBK’s indicative average rate stood at 103.80 compared to 103.66 on Monday.

The Kenyan currency opened the year at 102.50 to the dollar.

“Petroleum importers are looking at the Opec production cut deal and building up reserves in anticipation for the expected price rise that will require more dollars,” said a dealer at a local commercial bank, whose identity cannot be revealed because of the CBK gag.

The shilling has also depreciated against the euro, shedding 2.4 per cent of its value since the year began to stand at 109.67.

Should the depreciation against the hard currencies persist, the CBK faces the prospect of using more of its valuable forex reserves in support of the shilling.

It could also cut back the shilling’s liquidity from the market – a move that would hurt small banks already struggling for cash.

This is the first time the shilling is hitting the 104 mark since October 2015, when it was in the middle of a sharp depreciation that took it to 106 to the dollar.

The CBK at the time took a hard stance against currency traders, meeting them regularly to discuss the exchange rate.

Currency speculators normally hoard dollars anticipating that the shilling will regain lost ground affording them opportunity to sell the greenback at huge margins.

Related stories

AsokoNews Brief

Sign up for our weekly Africa Business Digest, highlighting the Top 5 stories per sector