Nairobi: The shilling strengthened to an 11-month high in Wednesday’s trading as commercial banks sold dollars to meet high demand for the local currency from buyers of Treasury securities. The shilling touched 82.90 units against the dollar, a level it last traded at on February 28 last year.
“Demand for dollars is down and this is part of the reason the shilling is strengthening,” said Solomon Alubala, head of trading at Co-operative Bank.
Currency dealers said the high interest rates on treasury securities had attracted foreign buyers while dollar inflows from the tea sector were also supporting the currency.
“Shillings are giving better yields of up to 20 per cent in government securities as opposed to holding dollars at a return of 0.5 per cent,” said Duncan Kinuthia, head of trading Commercial Bank of Africa.
The high cost of credit has dampened demand for dollars from importers, giving the shilling room to rise against the greenback.
“Because of high cost of credit that has reduced dollar demand among importers the shilling will remain strong in the coming days,” said Robert Gatobu, a trader at Bank of Africa.
Currency traders at the Bank of Africa and Co-operative Bank said the shilling could trade in the ranges of between 82.50 and 83.50 this week.
The Central Bank was in the market Wednesday to mop up Sh2 billion after staying out for a week.
Tight liquidity is expected to support the shilling. Improving liquidity had seen inter-bank rates drop to lows of between 9 and 18 per cent currently from between 21 and 24 per cent last week, according to Mr Kinuthia.
Traders also said the expected conversion of the $600 million syndicated loan to shillings could strengthen the shilling further. Tea, alongside horticulture are Kenya’s top foreign exchange earners. Tea earned Sh109 billion in 2011, while horticulture is expected to earn about Sh84 billion. Traders said high domestic interest rates were helping the shilling by slowing down demand for credit, and by extension, demand for imported goods, which had led to less appetite for foreign exchange from importers.
The shilling has gained over 23 per cent since mid October last year, where it traded at 107 against the greenback on high interest rates.
Traders, however, said that all the factors currently at play are temporary and that the fundamentals have not changed infavour of the shilling.
A strong shilling is essential in bringing down energy and transport costs that have largely been responsible for the high cost of living.
