Ugandan shilling weakens due to interbank dollar demand

The Ugandan shilling fell sharply on Friday, hurt by strong dollar demand by banks looking to cover short positions.

Commercial banks quoted the shilling at 3,410/3,420, against Thursday’s close of 3,365/3,375.

“There was a lot of speculative (dollar) demand mainly in the interbank,” said Shahzad Kamaluddin, a trader at Crane Bank.

“Players are expecting a rebound in appetite by firms for the coming dividend payments … that prompted short position covering.”

Sentiment for the local currency has also been turning negative this week, as traders try to build positions in anticipation of an interest rate hike by the U.S. Federal Reserve next week.

Global investors are seen cutting positions in risky emerging market assets if the Fed raises rates.

So far this year, the shilling is 18.8 percent weaker against the greenback.

The central Bank of Uganda (BoU) on Friday mopped up a total of 369 billion shillings ($108 million) from the interbank market via a seven-day repurchase agreement (repo) taken at 17 percent.

Kamaluddin said the mop up was likely to absorb some of the depreciation pressure, as it would make it more expensive to fund dollar positions.