Shilling loses pre-Christmas gains as market liquidity on the rise

The shilling has ceded back some of the gains it made against the dollar in the run-up to Christmas, as excess liquidity in the market weighs on the exchange rate.

Commercial banks traded the shilling at an average of 101.30 mid-day yesterday, having opened the day at 101.15 to the greenback.

The shilling had strengthened to an eight-month high of 100.63 against the dollar on December 24, a culmination of a week of gains that had been supported by diaspora remittances, low corporate dollar demand as most businesses eased activity in the Christmas period and balanced liquidity in the market.

Monday, Central Bank of Kenya indicated liquidity has grown since the post-Christmas trading resumed on Friday.

The regulator was in the market Monday to mop up Sh20 billion through seven-day repurchase agreements.

The surge in liquidity has been caused partially by the reluctance of banks to commit money into Treasury bill auctions, which last week raised only Sh4 billion against the Sh24 billion target. There were maturities of Sh15 billion during the week.

Underlying market conditions have, however, favoured the strengthening of the shilling, especially the narrowing current account deficit to 4.1 percent in the 12-months to October from five percent in December 2018 due to lower imports.

Diaspora remittances have also remained robust this year, rising by 3.8 percent to $2.546 billion (Sh256.4 billion) in the 11 months to November 2019 compared to the similar period in 2018. Dollar inflow has also come from tourism and portfolio investors money chasing Kenyan financial assets.