CURRENCY APPRECIATION

Shilling gains on export inflows, released hoarded dollars

The exchange rate of the shilling is on 101 mark in less a month after almost hitting 104

In Summary

•According to Thakar, the shilling having strengthened from almost 104 to 101.60 in less than a month may suggest significant dollar hoarding.

•Having started the year at 101.80, even a 0.50 movement in the right direction at the close of business on December 31st will be considered appreciation.

The shilling coins. Photo/Elkana Jacob
The shilling coins. Photo/Elkana Jacob

The Kenyan Shilling has appreciated to 101 mark on the third day against the dollar with experts attaching it to exports proceeds and likelihood case of dollar hoarding.

According to Central Bank's data, commercial banks quoted the shilling at an average of 101.80 against the dollar yesterday having dropped one shilling on Monday.

The Google trader quoted the shilling at 101.66, becoming more expensive to finance imports.

 
 
 

Last week it closed at 102.10 on Friday.

The quick gain follows trading at 103 in October and November. It started off the year at 101.87 hitting a high of 104.21 on July 21.

According to Financial risk management and investment analyst Mihr Thakar, the strengthening could be due to release of dollar purchased by speculators in anticipation a continuing weakening shilling from demonetisation and retained interest rate cap.

During the four months of demonetisation, the local currency registered an average exchange rate of 101.69, 103.16, 103.30 and 103.80 in June, July, August and September respectively, according to data by Kenya National Bureau of Statistics.

“The shilling having strengthened from almost 104 to 101.60 in less than a month may suggest significant dollar hoarding, with dollar sellers' capitulation,”  Thakar said.

Having started the year at 101.80, even a 0.50 movement in the right direction at the close of business on December 31st will be considered appreciation, he added.

The appreciation could also be attributed to now streaming revenues from exports, after higher price quoted on goods sold outside the country when the shilling was weak.

 
 
 

This also means higher profits to exporters.

“A little volatility in the shilling over the course of the year is healthy and shows the importance of "locking in" attractive exchange rates with the bank for export invoices with later payment dates," he added.

The shilling in March hit a low of  99.61, later picking up to the three digits due to international market conditions and delayed long rains causing inflation and declined revenues from the country's major export especially tea.

This was coupled by unmet domestic demand for maize and sugar exerting pressure on the shilling in the first 8 months of the year, Thakar adding that the impact was intensified in the demonetisation environment.

This despite the Central Bank governor Patrick Njoroge maintaining that the depreciation was not linked to exchange of the Sh1000 old notes. 

The gain on the shilling was also majorly sparked by plans to repeal the interest rate cap in early October, which led to a surge in portfolio inflows, as improved economic sentiment attracted foreign investors to buy government securities, banks and corporates stocks.

This caused an increase in share prices for stocks such as NCBA Group, Equity Group and KCB Group rise by 30.7 per cent, 24.2 per cent and 23.2 per cent respectively.

Market capitalisation, equity turnover and total shares traded at the time also increased by 3.7 per cent, 27.4 per cent and 35.7 per cent respectively during the week ending November  7.

However, in the latest CBK's weekly bulleting for the week ending November 14, the share price indices declined by about 4.1 per cent.

Similarly, market capitalization, equity turnover and total shares traded decreased by 4.1 per cent, 66.7 per cent and 64.0 per cent respectively.

"It is certainly in the interest of the country for the shilling to appreciate every year. It is not a matter of necessity but more of perception and aesthetics," Thakar added.