Wednesday, 21 December 2011

The Kenyan Shilling Strengthens Further

The Kenyan Shilling has continued to record impressive gains from the historic low of 107 it experienced in mid-October. The local currency is still rallying hard against the dollar (at the time of writing this article), and it is trading at the 83 level. This level was last seen eight months ago – in March this year.

The further strengthening of the Shilling is attributed to a myriad of factors, which do not work in segregation. It is of essence to note that the appreciation of the local unit is due to an intricate interplay of various macroeconomic factors, which have worked out in favour of the Shilling.

Most importantly, the decision by the Central Bank of Kenya to mop up excess liquidity in the market through repurchase agreement gave the Shilling a shot in the arm. The regulator made a controversial decision to increase the Central Bank Rates (CBR) and the Cash Reserve Ration (CRR). This move saw close to Ksh. 7 billion mopped out of the market some days ago. Consequently, this led to a further liquidity squeeze and made the Shilling to find its footing after months of free fall.

Besides the existing monetary stance, the Kenyan Shilling has also greatly benefited from low demand for dollars. Most investors holding onto their dollar positions have started relinquishing them in fear of further strengthening of the local unit. This panic move is attributed to the current tight liquidity as it is becoming unattractive to hold on the greenback.

In addition, the strengthening of the Kenyan Shilling is attributed to the increased inflows from tourism, horticulture, and remittances by the Diaspora. Since the Kenyan government embarked on major initiatives to boost tourism in the country, including fighting terrorists, the sector has recorded impressive growths. The horticultural industry has benefited from short rains that have been experienced in the country since October. And, maybe because it is the holiday season, the Diaspora have pumped in more cash to their families and friends in the country. Thus, the local unit has absorbed these glad tidings to make it become the world’s best performing currency.

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Will the impressive gains of the local currency continue? In the current monetary conditions, the upsurge of the Kenyan Shilling against the dollar is expected to continue. Since the Shilling got back on its feet (gaining about 22% of its value from the 107 level), forex dealers have made efforts to trim their dollar positions. In the coming weeks, traders will be watching for the 80 level. On the flipside, the local currency may have found a resistance at the 83 level and it may stay there for some time.

1 comment:

  1. It seems Mr and Mrs. Shilling have gotten married again. For months, Mrs. Shilling wondered from her husband and went to a distant land. After waiting and not losing hope, Mr. Shilling got back his wife and now they are remarried at the 83 level. Lo!