Loose cash flows wipe off Shilling recent gains

The Kenyan shilling closed at Ksh.103.85 against the US dollar in the week to September 6 to edge back closer to a five average low 104.30 reached at the end of July.

The dip in valuation has tentatively wiped off gains made by the shilling across the month of August with high liquidity still posing a significant impact on the local forex exchange rate.

Central Bank of Kenya (CBK) open market operations had in the subsequent provided respite to the shilling as the reserve bank stepped up its mopping up of excess market liquidity through the sale of government treasuries including repurchasing agreements (repos)

Additionally, the CBK has tapped into its bulk foreign currency reserve hold, selling of dollars to hold off further local currency depreciation in line with the banks volatility containment responsibility.

Even so, the open market operations have only represented temporal relief in stemming currency devaluation as the shilling sets off on another flat run.

Demonetization

While end month dollar demand from importers remains a plausible explanation to the shilling’s recent spike, demonetization has most recently featured as an ongoing matter in spite of its previous distancing from currency valuing by the CBK.

“The market is still awash with liquidity as more money has come into the system. It would seem people are still trying to beat the deadline on the changeover into the new series 1,000 notes, there being a notable demand for dollars to indicate the conversion of local currency into the US dollars,” Cytonn Investments research analyst Caleb Mugendi told Citizen Digital in a phone interview.

Mr. Mugendi further holds out for slight depreciation in the shilling’s value in the short run to a peak effective exchange rate of between Ksh.104 and Ksh.105.

The impact of demonetization had previously featured as an item of watch at the start of the government’s directive on the disgorging of the old series Ksh.1000 notes from the financial system.

This informed by an expected mix between a return of funds into the system and a thirst for US dollars by individuals who resolved to dispose of their bulk old notes for the lite dollars even as importer demand at the time remained a more overbearing concern.

“It’s still early days but if we continue to see persistent weakness in the Kenya shilling even after the seasonality effects have gone through, then that could reflect on the increased conversions under demonetization,” Standard Chartered Global Research strategist for Africa Eva Wanjiku said in a June interview.

Masked liquidity

A watch on financial market operations in recent weeks however hardly paints a picture of the ongoing loose cash flows in the economy.

The uptake of the weekly traded treasury bills whose buyers compose mainly of local investors has taken on a retreating curve while the interbank rate which informs the lending rate between banks has been on the rise.

The performance of government securities traded in the week to September 5 came in at a 62.6 percent subscription against an oversubscription of 113.5 percent at the close of July.

Interbank lending has meanwhile become more expensive to indicate of lesser flowing funds between lenders.

The interbank rate in the week to Thursday September 5 averaged 5.9 percent against significantly lesser 2.5 percent on August 1.