Foreign exchange dealers expect the shilling to gain as banks sell dollars following the tightening of monetary policy announced by the Central Bank last week.
The shilling has risen to the rate of Sh88.40 to the dollar from Sh91.60 last Friday, offering relief to importers and consumers because a weak shilling raises the price of goods, especially import ed ones.
The Kenyan currency is also expected to get a boost with the easing of end month dollar demand by importers later this week.
“We expect a more pronounced gain in the shilling after end of month demand ends,” said Gerishon Kanori, a dealer at Bank of Africa.
Dealers said banks were cutting back their dollar stocks in response to the Central Bank’s decision to raise the discount window to eight per cent last week.
The rate effectively rendered redundant the Central Bank rate which at 6.25 per cent created opportunities for margin trading in both the currency and inter bank markets.
The low rate meant one could borrow money from the Central Bank and invest for higher returns in Treasury bills (9 per cent.
The currency is expected to gradually reach about Sh83 to the dollar once a parity is found between local demand for oil and food; and dollar inflows from coffee, tea, tourism and horticulture.
Importers said their current stock of commodities are over priced and they expect cheaper goods in the next shipment. Motor vehicle dealers said the prices of cars has increased in the last three months by about 12 per cent translating to more than Sh100,000 increase in second hand cars.
“A Toyota Premio that was costing Sh800,000 early this year is now going for about 950,000. It is not a good time to buy cars,” said a car dealer along Lang’ata road. All second hand cars made in 2004 have come into the country with inflated prices putting off prospective customers.
“CBK has tightened liquidity by raising base lending rates and issued threats to currency dealers, calming the market. We therefore expect more strengthening,” said Fred Mueni , director Tsavo Securities.
He said the currency has been trading in levels not supported by market fundamentals and had instead been driven by speculation for the last three weeks.
Other imports include maize, construction machinery, oil, second hand clothes, metals and palm oil among others. Global commodity prices are expected to remain high in the remaining half of the year on high demand from development countries.
Importers, however, said this is good for them and they expect that this will continue so that imports can be much cheaper.
“We anticipate that this trend will continue as it makes it more favourable to import,” said Jimmy Mugerwa, Shell Kenya country chairman.
This is expected to reduce pressure on crude oil prices that have remained high on high demand and supply concerns.
Oil prices are still trading at highs of $112 a barrel, having dropped slightly from highs of $120 on political chaos in key producing countries of north Africa and the Middle east.
A number of exporters are holding their dollars as they wait for a more favourable rate before they convert to shillings.
But other dealers said the shilling might meet resistance from the current maize importation that is set to heighten dollar demand.
Currency dealers said the economy reflected a bias for high dollar demand and low supply.
The recently depreciating Shilling had piled pressure on the Central Bank that saw it send threats to currency dealers accusing them of speculative trading.
The Shilling had helped to increase The cost of raw materials such as fertilisers, putting pressure on food prices.
Dealers in the equity market said that if this trend continues they anticipate increased demand for local investment options such as equities by foreign investors. “It might add some lustre on the equity market if the trend is sustained in the long term,” said Mr Mueni.
I don’t think that the sudden fluctuation in shilling will got effect in importing business. For sure, it will affect only the basic commodities. I’m planning to buy a Toyota Premio this month.