Central Bank’s firefighting breaks Kenya shilling flat-run


Kenya's new currency. The Ksh,1000 note which will now be legal tender from October 1, 2019
Kenya's new currency. The Ksh,1000 note which will now be legal tender from October 1, 2019

In Summary

  • According to investors, the reserve bank was aggressive in its mop-up activities pumping out an estimated Ksh.75 billion via repurchasing agreements (repos) across four sessions.
  • Further, the shilling’s recovery would find impetus in the dispensation of further foreign currency from the usable foreign exchange basket with the account falling to Ksh. 938.2billion ($9.5 billion) to bring the country’s effective import cover to a flat six-months.
  • Beyond the open markets, the US Federal Reserve dropped interest rates for the first time since the end of the 2009 financial crisis by 0.25 points to hold off any further gains by the US dollar on other world currencies as investors mulled redirecting funds away from the US Treasury.

Central Bank stepped up its open market operations during the week to hold off further slides to the Kenya shilling valuation.

According to investors, the reserve bank was aggressive in its mop-up activities pumping out an estimated Ksh. 75billion via repurchasing agreements (repos) across four sessions.

The significant mop up saw the shilling reverse its recent flat run against the U.S. dollar to end on the right side of the four-year low Ksh. 104 mark, a ceiling breached in late July.

The Kenyan shilling touched a near two month high of Ksh. 103.23 at Thursday’s close before settling at Ksh. 103.65 at the end of the week.

Central Bank’s OMO provided respite to the weighty liquidity experienced in recent weeks to see both the slide of government paper yields and a hold of the inter-bank lending rate as more shilling units got sieved from the market.

While the interbank rate eased slightly to 2.51 percent the value of deals traded reduced to Ksh. 8.92billion from Ksh. 10billion despite a rise in banks excess cash reserves to Ksh. 6.32billion.

At the same time, yields on treasury bills for 91 and 182 days were eased 4.5 and 11.1 points as the government securities market saw a rise in the subscription rate of bills to 137.5 percent.

Further, the shilling’s recovery would find impetus in the dispensation of further foreign currency from the usable foreign exchange basket with the account falling to Ksh. 938.2 billion ($9.5 billion) to bring the country’s effective import cover to a flat six-months.

The combination of open market operations tools saw the CBK smoothen out liquidity linked volatility to the shilling, providing the much needed break to the shilling’s free-fall.

“Open market operations are ideal to correct the imbalance of liquidity in the market to the extent imbalanced liquidity influences currency exchange rate through the supply-demand mechanism,” said Genghis Capital Research Analyst Churchill Ogutu.

Beyond the open markets, the US Federal Reserve dropped interest rates for the first time since the end of the 2009 financial crisis by 0.25 points to hold off any further gains by the US dollar on other world currencies as investors mulled redirecting funds away from the US Treasury.

The relief from the monetary policy directive would however prove temporal at this time with the Fed opting out of committing to further cuts in the near term to leave investor at cross-roads.

Cuts to the US Treasury rates were expected to drive foreign investor funds to emerging markets equity and bonds market boosting their currency valuations.

Even so, yields on Kenya’s 7, 12 and 30 year tenured Eurobonds picked up by between 34 and 36 basis points during the week.

CBK’s intervention through the open markets sits along the reserve’s mandated mediation of the shilling which serves to root out observed volatility to its forex exchange.

“We do not target a rate as we only intervene to minimise volatility in the market can be destabilising in the foreign exchange market and other areas of the market,” states CBK Governor Patrick Njoroge’s standard mantra on the reserve’s shilling-linked operations amid suggestions of its overbearing influence on the shilling’s value.

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