Shilling hits near two-month high against the dollar

The Kenya shilling has rallied against the US dollar hitting a near two-month high in early trading on Wednesday.

The local unit was for instance quoted changing hands for the green buck at Ksh.108.60, its strongest position since October 14 when it was quoted at Ksh.108.56.

The new trend represented in a strengthening shilling is attributable to multiple factors including the easing of the US dollar against other world currencies falling from a previous strong position.

This combined with recent intervention measures by the Central Bank of Kenya (CBK) to minimize volatility in the local unit including selling dollars in the interbank market and mopping up liquidity through the sale of repurchasing agreements (repos).

CBK’s usable foreign currency reserves for instance fell slightly by Ksh.1.3 billion ($12 million) even as the reserves cover for imports remained unchanged at 4.8 months.

Meanwhile, the interbank rate which represents the costs between banks for short-term/overnight credit lines continued to rise hitting 5.75 per cent on December 17 from a lower 4.25 per cent a week earlier to signal the tightening of liquidity.

The new rally serves to slam brakes on the local unit’s wretched run in the past two months which saw the shilling breach both the Ksh.110 and Ksh.111 confidence markers to near Ksh.112.

The cooldown in weakening brings down the shilling’s year to date loss against the US dollar below double digits with the shedding now standing at 7.3 per cent.

Previous weakening in the local unit has been tied to an unmatched demand for dollars in the interbank market along with weakened economic prospects for Kenya following the advent of COVID-19.

In contrast, the now fading US dollar has been linked to uncertainty surrounding the approval of $900 billion fiscal stimulus by President Donald Trump who is pushing for higher amounts on fiscal stimulus cheques to American citizens.

The strengthening shilling will serve to reduce pressure on import costs to traders along with easing government’s external debt repayments which fall due in the near term.