Shilling likely to weaken ahead of the CBR policy meeting

The surge in demand for forex in the last couple of weeks pushed the Uganda Shilling to a three month record low at the end of the week.

The Shilling breached the key level of 3450 and was threatening to test new lows.

"Strong demand was seen mainly from importers that were placing orders for end of year holidays, interbank demand as commercial banks were squaring positions and the offshore investors  that were cutting their securities positions due to falling yields in the fixed income space" Stephen Kaboyo of the Alpha Capital said.

All these factors created a negative sentiment for the Shilling. In attempt to calm the markets, Bank of Uganda (BOU) suspended its daily forex purchase.

In the government securities market, BOU auctioned sh165b in treasury bills. The auction was oversubscribed and yields fell across the board to 13.328%, 14.568% and 15.594% for 91, 182 and 364 days respectively.

"In the international currency markets, the Dollar remained generally anchored as markets focused on the likelihood of US interest rate hike in December, while the British Pound continued to be undermined by Brexit concerns," Kaboyo noted.

By Friday afternoon, the shilling was trading in the range of 3442/3452 compared to Thursday's close of 3427/3437 buying and selling respectively.

"Outlook for the shilling indicates that the shilling is likely to maintain a weak stance ahead of the Central Bank Rate (CBR) policy meeting where it is expected that the prevailing depreciation pressures will take centre stage in the discussions. The imbalance in the forex market will continue to be a major source of volatility" Kaboyo added.