Kenya shilling slumps to new record low

October 11, 2011

, NAIROBI, Kenya, Oct 11 – The Kenya shilling hit an all-time low on Tuesday, sinking to Sh106.85 against the dollar and beating its previous record low of Sh104.20 in September.

The drop comes less than a week after the Central Bank of Kenya raised its benchmark lending rate to 11 percent in an effort of saving the falling shilling, an indication of market volatility.

After closing Monday’s, trade at Sh103.20/70, the shilling fell to match its previous record low of Sh104.20 by 10am. Half an hour later, major commercial banks were quoting the shilling at Sh106.40/60 against the dollar.

Duncan Kinuthia, a Trader with Commercial Bank of Africa said sustained corporate demand and low dollar inflows had driven the day’s trade with the shilling losing three percent to the greenback.

“The market has also witnessed wide spreads that has led to the drastic slide after opening the day at 102 against the dollar with players opting to take cautious positions,” Kinuthia said.
Last week, the CBK raised its indicative rate by four percent to 11 percent from the previous seven in an effort to tighten monetary policy that would discourage borrowing from banks and cool demand, check inflation and stabilise the currency.
Evans Mugi, a research analyst with Genghis Capital said the measures taken by the CBK’s Monetary Policy Committee were meant to increase the cost of funding and force traders to cut their foreign exchange positions.
However, the average interbank rate has risen to about 12 percent, with Mugi arguing that it gives forex dealers the flexibility to take larger positions and still profit from trading.
“The interbank needs to go higher (than 12 percent) before we can see impact on the shilling. That may take between one and two weeks before it’s realised,” Mugi said.
Last week analysts at PineBridge Investments said there was little reason to be bullish about the shilling in the near term even with the CBK intervention.
PineBridge senior Investment Manager Edward Gitahi was of the opinion that the Kenya shilling has been one of the fastest depreciating currencies, loosing 24.9 percent to the dollar, adding he expects it to trade in the Sh98/100 band for the rest of the year.
However given the volatility in Tuesday’s trading session, Genghis Capital is projecting, the shilling will go as high as Sh107.50 – 107.90 before stabilising.

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