Shilling continues to strengthen against dollar

October 28, 2011
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, NAIROBI, Kenya, Oct 28 – The Kenyan shilling strengthened on Friday against major world currencies for the third day running with dealers quoting the unit at 98.90 versus the dollar in early morning trade.

The rate against the greenback was the strongest in the last 10 days with analysts attributing the gain to factors such a rise in the average interbank rate and that of the discount window which have risen to 19.79 percent and 20.98 percent respectively.

“The shilling’s ‘recovery’ is based on several factors including but not limited to the high discount window rate/overnight rate that increases the opportunity cost of selling the shilling currently at 20.98 percent,” explained Genghis Capital Research and Investment Analyst Evans Mugi.

He also remarked that the currency could also be reacting to last Friday’s move by the Central Bank of Kenya to restrict offshore trading as well as its direct intervention that has seen it sell more US dollars in the market.

According to the analyst, the request to have the International Monetary Fund (IMF) lend an additional Sh25 billion to help Kenya shore up its foreign exchange reserves could also be a factor.

On Wednesday, it emerged that IMF could in fact begin to disburse part of the money before the end of the year and hence the positive impact on the local unit.

And having breached the 99.85 level, Mugi said the next support level for shilling versus the dollar is 98.50, and projected that it would likely stay there before heading toward the 97.02 level.

Going forward however, he expects the shilling to recover further before the end of the year and trade within the 96.20 to 96.50 band.

And following the striking of a comprehensive deal to resolve the Euro debt crisis which has resulted in a rally in major stock markets around the globe, he anticipated that the local money markets would benefit from that as well.

The local bourse has been on a rally for the last four days and the analyst projected that the NSE 20 share index would close above 3,400 points on Friday.

“The rally is a positive reaction to earnings season, with companies -especially financials seen benefiting following good results by Equity Bank and KCB. Most activity is attributable to foreign investors scooping up bargain stocks but we have also seen retail back in the market,” he added.

While cautioning that it is still too early to tell if the tide has turned, Mugi said they are watching for a breach of 3,500 as a positive signal in that direction.

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