The Kenyan shilling depreciated against the US dollar by 1.4 per cent in January hit by heightened dollar demand from importers.
The currency has, however, strengthened since the beginning of February as investors inflows rise. In January, the local unit averaged 103.9 against the dollar from a high of 102.5 in December last year.
“The weakening of the shilling during the month was mainly driven by increased dollar demand from oil importers in anticipation that the currency would weaken further on account of global strengthening of the dollar following the U.S. Fed rate hike in December,” Cytonn, a Nairobi-based investment firm, said.
Expected recovery of global oil prices following Organisation of the Petroleum Exporting Countries (Opec)’s decision to cut down production this year also made importers seek to import more volumes, pushing up demand for dollars.
Last week, however, the local unit gained 0.1 per cent against the dollar, supported by foreign investor inflows and dollar weakness in the global markets, according to Cytonn.
The strengthening of the shilling has helped CBK’s foreign exchange reserves swell as the apex bank does not need to sell more dollars to prop up the currency.
Last week, the reserves stood at US$6.95 billion, an equivalent of 4.59 months of import cover from US$6.94 billion or 4.52 months of import cover from the previous week.
They hit a low of US$6.85 billion or 4.52 months of importer cover mid-January.
The forex reserves have declined from a peak of US$7.8 billion in October 2016 or equivalent to 5.2 months of import cover.
“It is important to note that if the reserve levels drop too low, the government can access the International Monetary Fund credit facility,” said Cytonn.