Shilling weakens due to end of month demand

 

KAMPALA - The Uganda shilling traded in a bearish mode, breaking trend lines to trade in the range of 3770/3780 due to a surge in demand that was mainly driven by energy and manufacturing end of month forex requirements, a report by Stephen Kaboyo of Alpha Capital Partners indicates.

 

In the inter-bank money market, rates held steady to trade at 5% and 9% for overnight and one week funds. Some pockets of liquidity tightness were emerging.

 

On Wednesday, the shilling was quoted at 3,792/3,802 weaker than the morning session of 3,778/3,788.

 

In the fixed income space, there was no primary auction. The next treasury bill auction was scheduled for Wednesday.

 

In the regional currency markets, the Kenya shilling firmed up against the dollar supported by subdued demand and was expected to strengthen in the coming week on the back of improved forex inflows. Trading was in the range of 101.30/50.

 

In the international currency markets, the US dollar tumbled on fears of global trade conflicts which had somewhat receded over the past few week, were reunited as US announced that they would impose tariffs on aluminium and steel imports from Canada, Mexico and EU.

 

In commodities, oil market fundamentals remained bullish with a barrel of brent crude trading at US$78.27.

 

"Outlook for the shilling suggests a weak shilling undermined by the sustained demand mainly from the energy sector.

 

It is likely that shilling will trade past the next resistance level of 3800, if supply conditions do not change.

 

BOU intervention may be the only factor to reverse the trend," Kaboyo said.

 

Sulaiman Nyanzi, an economist noted that the exchange rate was expected to depreciate.

 

He explained that the depreciation of the shilling is not taking BOU by surprise but the huge volatility is one thing to be worried about.

 

He added that when exchange rate depreciates, imports become costly and makes exports cheaper.