Friday, 2 December 2011

The Kenyan Shiling: Signs of hope?

Concerted efforts by policy makers to a more aggressive monetary stance to fight inflation and currency volatility has made the Kenyan shilling become the best performing currency in the world recently. Is this a sign of hope that the local currency, which hit a low of Ksh.107 to the dollar in mid-October, is strengthening further?

Currently trading at Ksh. 90 to the dollar (as per the time of writing this article), the home currency has since considerably gained approximately 15% composure from its historic 17-year low in mid-October.

This wonderful gain within a short time is largely attributed to the decision by the Central Bank of Kenya (CBK), through its monetary policy committee, to increase its indicative lending rate to banks to 16.5% in early November. Therefore, as traders continue to offload their dollar positions in the market, the demand for the shilling is rising, and this is leading to its impressive appreciation. This relative scarcity of the shilling is playing an essential role of meeting CBK’s objective of mopping up liquidity in the market.

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Will the gains of the local currency continue? In the current monetary conditions (the sky-high interest rates), the shilling is expected to strengthen further. At the moment, most banks have set their lending rates to just above 31%, and this will lead to further scarcity of the home currency. Analysts have pointed out that the 90 level is currently a psychological area of resistance. Thus, any slump to below that level could make the shilling touch the 85 level soon. On the other hand, if it falls below that level, it can retreat back to the 95 level.

So, which way will you go Mrs. Shilling? Let’s wait and see….

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