Shilling now hits 85 on increased tea export dollars

Farmers pick tea in Mathira, Nyeri County. Tea exports helped strengthen the shilling to 85 units to the dollar. FILE 

By CHARLES MWANIKI,

In Summary

• Thursday marked the first day this year that the shilling has touched the 85 range to the dollar.
• Commercial banks quoted the shilling at an average of 85.80/90 on Friday, as dealers reported increased dollar inflows from exporters, especially from the tea sector.
• Traders see the likelihood of further strengthening as the local unit factors in inflows from upcoming government bond issues.

 

The shilling strengthened to the 85 units to the dollar range helped by inflows from tea exports and investors looking to buy the 10-year Treasury bond.

The Central Bank of Kenya quoted the shilling at an average rate of 85.89 units to the dollar, having strengthened from the week’s opening level of 86.63 units to the US currency. Thursday marked the first day this year that the shilling has touched the 85 range to the dollar.

Commercial banks also quoted the shilling at an average of 85.80/90 on Friday, as dealers reported increased dollar inflows from exporters, especially from the tea sector.

“We see the increased inflows because when the shilling weakens exporters, including those in the tea sector, will look to sell to take advantage of the rate as they get paid in dollars,” said Commercial Bank of Africa senior dealer Joshua Anene.

In 2014, the shilling has generally exchanged to the dollar in the mid 86 levels, but traders now see the likelihood of further strengthening as the local unit factors in inflows from upcoming government bond issues.

Cash raised from the bond, expected to be between Sh130 billion and Sh172 billion ($1.5-$2 billion), will be used to partly plug a Sh230 billion national budget deficit, fund infrastructure spending and also retire a $600 million syndicated loan borrowed from global banks in 2012.

The Eurobond in particular has the potential of strengthening the local currency, with the bond being denominated in dollars some of which will be converted into shillings hence increasing dollars in the market.

READ: Treasury sets end month for sale of Sh172bn Eurobond

Should interest rates fall, however, as a result of reduced demand of government debt, the shilling could weaken due to erosion of yields differentials.

Bank of Africa head of trading Peter Mutuku said that the shilling has also benefited in the past week from positive investor sentiment following the visit of the IMF managing director Christine Lagarde, with the IMF pointing out Kenya is on a positive growth track.

The disclosure that the country is considering accessing a credit arrangement from the IMF to cushion against economic shocks has also reassured the market that the country would be better equipped to handle economic shocks in the near future.

Under the envisaged IMF support, Kenya will access funds as and when required to mitigate effects against shocks.

Mr Mutuku added that good investor sentiment has also brought good demand for the Sh10 billion 10-year government bond, whose sale closes on January 21, hence increasing the dollar inflows.

“The 10-year paper is attractive for foreign investors, and demand is still there supported by positive investor sentiment,” said Mr Mutuku.

There were concerns in the market that the fixed-coupon bond would attract low investor interest as buyers reserve cash to participate in the upcoming Eurobond offer