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September 24, 2018

Shilling slumps -2.16% against Dollar since US Election

Money contributed by members of the proponents of the published constitution for the YES Campaign Secretariat at KICC Yest./FILE
Money contributed by members of the proponents of the published constitution for the YES Campaign Secretariat at KICC Yest./FILE

The Kenya Shilling closed out the week trading around the 103.70 Level and that makes a -1.17 per cent slide versus the Dollar since the start of the year. That slide created a flurry of media demand for comment and it never ceases to amaze me how relatively small moves in the Shilling create such an outsize hullabaloo. I am always tempted to preface any comment or opinion with the following comment.

Please note you can pretty much walk into a bank or bureau and change your Shillings with a 50 cent bid-offer spread. Today across vast swathes of Africa this is not possible. Take a look at how many countries are running official [typically overvalued] and parallel currency markets. Nigeria and Angola spring to my mind. Furthermore, The Shilling exhibits less volatility than nearly all of its Sub Saharan Africa peers. Our forex markets are visible, liquid and transparent which is commendable.

So the Shilling has fallen -1.17% versus the Dollar since the start of 2017 and -2.167% since November 8. I cite November 8th because that was when Donald J. Trump was elected US president and his election was the starting pistol for a sharp ''Trump'' rally. The Dollar Index [The Dollar versus a basket of currencies] has been on a tear and rallied +6.185% between November 8th and its January high last week. The Shilling has been facing down a very vibrant Dollar, others have been capitulating. The Mexico Peso [sits at the bleeding edge of Trump's policies] and the Turkish Lira [finds itself at the epicentre of Syrian blow-back] have slumped to all time lows during this period. In fact since November 8th, the Kenya Shilling has outperformed the fall in the Dollar Index by a very wide margin. If we had matched the Dollar Index rally since Nov 8th, The Shilling should be trading at around 107.00, it is this thinking that might be informing the bearish Shilling view. 107.00 is a key chart level [It was an intra-day low in 2011] and a violation of that level would be problematic from a chart based analysis.

If you were to look at a trade-weighted Shilling, you will note that the Shilling has appreciated against nearly every currency in that trade-weighted index.

I am not privy to the thinking at the Central Bank of Kenya but market participants are of the view that they might look to dial down the level of their interventions. We are in an election year and whilst I appreciate this is an election for the president to lose, election years tend to lop off 1.4 per cent off the Gross Domestic Product as folks take a ''wait and see'' approach and position themselves defensively. This defensive posture tends to weigh on the Shilling. Sub-optimal precipitation [evidenced in water-rationing] is also a concern. Weather shocks like drought typically send food prices higher and that feeds into inflation very quickly. The Inflation outlook is not looking as benign as it was previously. The biggest single expense item for Kenya and in fact for East Africa is in fact the fuel import Bill. Lower crude oil prices have been a significant tail-wind for East Africa. Of course the lower oil price structure crashed SSA Economies from Luanda to Abuja and many other places in between. Crude oil prices have been pushing higher on OPEC quota discipline optimism. I expect crude oil prices to hold below $60.00 a barrel in New York through 2017 and that this recent uptick to fade.

We also need to watch the government's bond auction data carefully now. The Interest rate cap bill stampeded banks into government's paper. That demand appeared to be tapering at the year-end.

All is not lost though going by some of the commentary you might think it was.

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