Most frontier African currencies are expected to come under pressure next week as foreign investors sell domestic bond holdings and repatriate funds.
The Kenyan shilling is seen under pressure due to yields on government securities tumbling into single digits and importers buying dollars on fears that the local currency will depreciate further.
Falling government bond yields and a global rush into the dollar stoked by fears of a possible Greek exit from the euro have hammered the shilling in recent days, sending it into negative territory against the dollar so far this year.
At 11:55 SA time, commercial banks quoted the shilling at 85.25/45 per dollar, a four-month low reached on January 27, and 0.2 percent weaker than last Thursday's close of 84.25/45.
“Lower yields on our debt have sent foreign investors packing. Importers are also bearish on the shilling and are buying greenbacks before it falls further,” said a senior trader at one bank.
Technical charts showed shilling support at 85.80, and traders said all eyes were on developments in the euro zone.
The central bank has been active selling unspecified amounts of dollars to commercial banks and soaking up liquidity to support the shilling, and will continue to do so into next week, traders said.
The regulator has mopped up 55.8 billion shillings ($655 million) since April 27 when liquidity surged suddenly and sent overnight rates sharply lower.
The weighted average interbank interest rate edged up to 19.4 percent on Wednesday from 19 percent the previous day aided by the mop-ups.
“Central Bank intervention has helped the shilling. However, demand continues to dominate trade. We expect the shilling to remain under pressure in the coming week,” Bank of Africa said in a daily report.
($1 = 85.2000 Kenyan shillings)
The Ugandan shilling is expected to remain under strain, undermined by importer demand for dollars and increased risk aversion to emerging market currencies due to concerns over the euro zone debt crisis.
Manufacturers usually place large dollar orders towards the end of the month as they prepare to pay for raw material imports to stock up for the following month, putting the local currency under pressure.
At 13:13 SA time, commercial banks in Kampala quoted the currency of Africa's largest coffee exporter at 2,485/2,495, a touch weaker than last Thursday's close of 2,470/2,480.
“The euro zone will continue to pose pressure to weak currencies like the shilling,” said Faisal Bukenya, head of market making at Barclays Bank Uganda.
“Plus we anticipate month-end demand which will probably push the shilling up slightly but it will still remain in the 2,480-2,500 range.”
Bukenya said possible greenback inflows from offshore investors taking part in a Treasury Bill auction next week might offer the local currency some support.
The Bank of Uganda is scheduled to sell a total of 120 billion shillings ($48 million) of Treasury bills of 91-, 182-, and 364-day tenors on Wednesday.
The bank this month left its key lending rate unchanged at 21 percent for a second consecutive time from April despite a fall in inflation.
“Next week's auction might bring in some inflows which will keep the shilling stable around the current levels,” said Denis Mashanyu, a trader at Standard Chartered Bank in Nairobi.
Tanzania's shilling is expected to weaken, driven by demand for dollars from the oil sector and speculative trading.
Commercial banks in Dar es Salaam quoted the shilling at 1,588/1,598 on Thursday, weaker than 1,581/1,591 a week ago.
“The shilling has been weakening due to a mixture of both demand for dollars and also speculation,” said Patrick Kapella, chief dealer at First National Bank Tanzania.
“There was a little bit of panic when the shilling crossed the resistance level of 1,600 earlier this week, but we expect it to be capped in the days ahead.”
Traders said the shilling was now eyeing the psychological level of 1,600 and could trade in the 1,590-1,600 range next week.
During the week, it hit 1,593 to the dollar, a level it last touched on March 29.
“There is demand from oil importers, who have been picking up dollars at high levels. We even actually crossed the 1,600 level for a few hours yesterday,” said Eric Chijoriga, a dealer at NBC Bank, a unit of South Africa's Absa Group.
“We expected to see some month-end inflows and proceeds from cotton exports but these haven't been forthcoming so far.”
The central bank said on its website it had traded $20.85 million on the interbank foreign exchange market over the past week.
The naira will remain under pressure next week due to strong demand for dollars from offshore investors exiting local debt.
It was trading at 160 to the dollar at 13:25 SA time, weaker than Wednesday's close of 159.50.
Traders said offshore investors in short-dated debt were selling down their holdings and repatriating funds, putting further pressure on the local currency.
“The market is under sustained pressure from fuel importers and offshore investors selling down their debt holdings. Even with direct dollar sales by the central bank to some lenders, the naira continues to lose value,” one dealer said.
The naira, which had stabilised around 157 to the dollar for more than three months of this year, came under pressure two weeks ago from strong dollar demand by fuel importers and investors repatriating dividends.
“We are expecting some dollar inflows from energy companies for their month-end sales but because of the sustained demand pressure, the naira will continue to trade around the 159.70-160.20 to the dollar in the near term,” another dealer said. - Reuters