Ugandan shilling weakens

The Ugandan shilling lost substantial ground on Tuesday, touching a key psychological level as it was hammered by surging appetite for dollars from corporate clients and commercial banks.

At 0917 GMT commercial banks quoted the shilling at 3,690/3,700, weaker than Monday’s close of 3,665/3,675.

Traders have mentioned 3,700 in recent weeks as the next key support level, saying breaching it was likely to alarm the central bank and possibly trigger an intervention.

“There’s significant buying interest (for dollars) from both corporate clients and in the interbank,” said David Bagambe, trader at Diamond Trust Bank.

Most corporate demand, he said, was coming from firms in the manufacturing and energy sectors.

“The pressure is being exacerbated by the fact this demand is coming amidst weak inflows,” he said.

Uganda relies on shipments of coffee, tea, fish, cocoa and other commodities for its hard currency earnings but traders say the slowdown in prices of these items has depressed the country’s foreign exchange inflows.

Bagambe said the negative investor sentiment toward the shilling was also tracking the weakening trend of other sub-Saharan African currencies.

Most sub-Saharan African currencies have posted sharp losses this year, hurt by cooling commodity prices and expectations of an interest rate hike by the U.S. Fed reserve.

So far this year, the shilling is 25 percent weaker against the greenback.

Traders say demand for greenback is likely to rise steeply in October as importers stock up on hard currency to pay for merchandise shipments targeting year-end shoppers.

The increased dollar demand, coupled with jitters over a deteriorating trade balance, and political uncertainty ahead next year’s polls are expected to keep the shilling vulnerable in the coming months, traders say.