MONEY MARKETS

Shilling appreciates 1.2% against US dollar as Corona eases

Shilling picking up after 2020 beating

In Summary

• It has also gained remarkably against the Starling Pound and Euro after hitting five-year highs of 154 and 137 in December last year. 

• The shilling slumped below 110 mark in November to sell at 110.06

The new look Kenyan currency notes.
The new look Kenyan currency notes.
Image: ENOS TECHE

The Kenyan shilling is on a rebound against major international currencies after being weighed down by the effects of Covid-19 on the economy last year.

A money market analysis by Cytonn Investment shows the local currency has appreciated by 1.2 per cent against the dollar, in comparison to the 7.7 per cent depreciation recorded in 2020.

It has also gained remarkably against the Starling Pound and Euro after hitting five-year highs of 154 and 137 in December last year. 

The shilling slumped below the 110 mark in November to sell at 110.06, after a period of sustained depreciation which started in March last year when it was trading a moderate 102. 

The drop in shilling's value on high demand for dollars and holdbacks by investors pushed up the cost of living in the country amid low income as government-issued tough measures to combat the virus.

The annual inflation rate in Kenya rose to 5.87 per cent last month from 5.76 per cent in the prior month, mainly due to the cost of transport (16.76 per cent compared to 17.19 per cent in April) and food & non-alcoholic beverages (7.02per cent compared to 6.42 per cent).

On a monthly basis, consumer prices rose 0.20 per cent, down from a 0.82per cent increase in the previous month.

''Despite the recent appreciation, we expect the shilling to remain under pressure due to uncertainties in the global market due to the  Covid-19  pandemic, which has seen investors continue to prefer holding their investments in hard currencies and commodities,'' Cytonn said.

Demand from merchandise traders as they beef up their hard currency positions in anticipation of more trading partners reopening their economies globally is likely to pin down the local currency. 

Even so, the recently approved $750 million and expected disbursements of other tranches of the $2.34 billion (Sh255 billion) facility from the International Monetary Fund Market is likely to shore up Kenya's forex reserve, ironing out volatiles. 

The country's forex reserves are currently at $7.5 billion over  (equivalent to 4.6-months of import cover), which is above the statutory requirement of maintaining at least 4.0-months of import cover, and the EAC region’s convergence criteria of 4.5-months of import cover. 

Money market experts at Cytonn are also counting on the stable current account position which is estimated to remain at a deficit of 5.2 per cent of GDP in 2021.

Improving diaspora remittances evidenced by a 43.8 per cent year-on-year increase to $299.3 million in April 2021, from $208.2 million recorded over the same period in 2020, is another key factor cushioning the shilling against further depreciation.