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Currencies priced on a US fed rate hike ahead of decision

US Federal Reserve Chair Janet Yellen in recent months has signaled that the case for raising rates has grown stronger/AFP-File

US Federal Reserve Chair Janet Yellen in recent months has signaled that the case for raising rates has grown stronger/AFP-File

NAIROBI, Kenya, Nov 13 – The US Federal Reserve’s Open Market Committee is set to meet tomorrow to agree on the path of monetary policy with analysts seeing a rate hike by 25 basis points. 

Analysts at Cytonn Investments predict the federal funds rate will increase to a minimum 0.5 per cent owing to the rising inflationary demand pressure that pushed the inflation rate to a two year high inflation of 1.6 per cent just below the target of 2 per cent.

The improvement in the labour market as evidenced by the drop in unemployment rate to 4.6 per cent compared to 5 per cent for a similar period last year is also seen as a contributing factor.

“Other factors include increased GDP growth as the US economy grew by 2.9 per cent in the 3rd quarter which is the highest quarterly growth in two years,” the analysts stated.

The move is likely to see the dollar strengthen against other major global currencies, hence may have an adverse effect on the shilling in the short to medium term.

 

 

This is likely to see the dollar strengthen against other major global currencies, hence may have an adverse effect on the shilling in the short to medium term.

Commercial Bank of Africa Senior Trader Antoninah Oyenga says most currencies are already priced on a rate hike.

Oyenga says though the shilling will weaken, the Central Bank is expected to cushion it as it has been in the recent past, coming in quite often.

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“The shilling should have now hit the 104 levels, but the authorities have held it steady, “she explained.

In recent weeks, the months of import cover has declined to below the 1-year average of 4.9 months, and is currently at 4.8 months, similar to the previous week.

Just 2-months ago, on 6th October 2016, there was 5.2 months of import cover indicating a worrying trend as the rate of decrease in the reserve could be an indication that the CBK is using a lot of reserves to support the shilling.

kenya-import-cover

The shilling on Tuesday traded at Sh102.00 against Sh102.20 to the dollar slipping further against the green back as it came under pressure trading above the key 102 psychological levels from the most of the session on account of renewed dollar appetite from players  in the energy sector against thin foreign currency inflows.

Moving forward we expect cautious trading as players shift attention to the global scene ahead of the fed interest rates decision tomorrow.

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