Shilling under pressure as dollar demand rise

The Uganda shilling came under renewed pressure last week as strong dollar demand from offshore investors and large corporate importers outweighed intermittent foreign-currency inflows, according to Absa Bank Uganda.

The local currency opened the week strongly, appreciating from Shs3,930/3,940 to Shs3,895/3,905 against the US dollar as subdued hard-currency demand and inflows from commodity exporters and charities offered support.

The shilling strengthened further to an intraday high of Shs3,890/3,900 on Tuesday, supported by healthy interbank and offshore dollar inflows ahead of a Treasury bond auction.

However, the gains were short-lived as renewed offshore demand reversed the appreciation later in the week, with the shilling trading at Shs3,985/3,995 against the dollar by Friday afternoon.

Richard Nsubuga, Head of Trading, CIB Markets at Absa Bank Uganda, said the shilling had weakened by about 5.34 per cent through September and 12.03 per cent over the previous 12 months.

Nsubuga said the local currency could remain vulnerable to renewed dollar demand from offshore investors and large corporate importers, particularly in the energy, manufacturing and telecommunications sectors.

He said the broader depreciation pressure could also be amplified by high international oil prices, offshore portfolio adjustments and uncertainty surrounding the conflict in the Middle East.

“Nevertheless, foreign-currency inflows linked to government securities, commodity exports, charities, remittances and tight liquidity in the money markets could periodically provide support and limit the extent of depreciation,” Nsubuga said.

In the near term, he expects the shilling to trade within the Shs3,920 to Shs4,000 range against the dollar, although risks remain tilted towards further weakening if offshore and corporate demand intensifies.

Money market tightens

Money market conditions also tightened towards the end of the week, with overnight funding rates rising from 9.42 per cent to 9.75 per cent early in the week before climbing sharply to 11.50 per cent on Thursday.

Nsubuga attributed the increase to the implementation of the new 13.50 per cent Cash Reserve Ratio, which reduced the amount of liquidity available to commercial banks and pushed up short-term interbank funding costs.

The tightening came alongside a Treasury bond auction in which yields on the reopened two-year and 25-year bonds rose to 12 per cent and 16.25 per cent respectively.

The five-year bond yield was broadly unchanged at 13.74 per cent, while the newly issued 15-year benchmark bond cleared at 15.25 per cent.

The 15-year bond, however, attracted accepted bids worth only Shs89.4 billion.

Overall, the auction recorded an acceptance rate of 86 per cent, with Shs1.2 trillion in face value accepted. Demand was heavily concentrated in the 25-year bond, which accounted for Shs1.036 trillion of the total allocation.

Nsubuga said activity in the secondary government securities market remained subdued after the auction as investors adopted a cautious stance.

He expects liquidity conditions to remain relatively tight as banks adjust to the higher reserve requirement, potentially keeping interbank funding rates elevated and maintaining upward pressure on government bond yields.

Kenya shilling remains stable

In Kenya, the shilling remained broadly stable against the dollar during the week, although it weakened marginally towards the close as dollar demand increased.

The Kenyan currency opened around 129.50 against the dollar on Monday, with balanced flows in the client and interbank markets keeping the exchange rate relatively stable.

Trading remained range-bound during the first half of the week as improved interbank liquidity allowed larger transactions to be absorbed with limited movement in the exchange rate.

Corporate and interbank dollar demand increased from Wednesday, pushing the pair to around 129.45/55.

Month-end conversions by corporates and non-governmental organisations, together with remittance inflows, helped moderate the pressure.

Nsubuga said the Kenya shilling was expected to remain broadly range-bound, supported by diaspora remittances, NGO inflows and adequate foreign exchange reserves.

Oil markets diverge

Global oil markets recorded mixed movements, with West Texas Intermediate falling 1.1 per cent to $94.74 a barrel, while Brent crude rose 6 per cent to $106.37.

Prices initially declined after Saudi Arabia made progress in restarting its East-West pipeline and crude loadings recovered to about 5.6 million barrels per day, easing immediate supply concerns.

Brent later rallied sharply as disruptions to Persian Gulf exports persisted and uncertainty remained over efforts to reopen the Strait of Hormuz.

The divergent movements widened Brent’s premium over WTI from $4.56 to $11.63 a barrel, reflecting greater exposure to global supply risks.

The prospect of a US diesel export ban also added volatility to the market by pushing European diesel prices higher relative to US prices and raising concerns about refining incentives and future fuel supplies.

Nsubuga said the near-term direction of oil prices would depend largely on the Saudi pipeline restart, progress in US-Iran talks over the Strait of Hormuz and whether the United States proceeds with restrictions on diesel exports.

Gold falls as US yields rise

Gold prices declined about 2.4 per cent during the week to $4,273.97 an ounce, although the metal remained about 14 per cent higher over the previous year.

The main pressure came from a rise in US 10-year real yields to 2.80 per cent, their highest closing level in roughly 18 years, increasing the opportunity cost of holding non-yielding gold.

Hawkish comments from several Federal Reserve officials and stronger-than-expected US economic data also strengthened expectations of further interest-rate increases.

Gold fell about 1.7 per cent on Wednesday as markets responded to the developments.

The precious metal also remained sensitive to oil price movements, with higher energy costs fuelling inflation concerns and expectations of tighter monetary policy.

Dollar strengthens against euro and pound

The US dollar also strengthened against both the euro and the pound during the week.

The euro-dollar exchange rate fell 0.97 per cent from 1.1486 to 1.1375, while the pound-dollar rate declined 1.32 per cent from 1.3395 to 1.3218.

Nsubuga attributed the movements largely to broad dollar strength, supported by resilient US economic data and hawkish Federal Reserve commentary.

Higher oil prices, approaching $100 a barrel, added pressure on European and UK economies by increasing inflation risks while weighing on growth prospects.

The euro’s decline was partly limited by hawkish signals from the European Central Bank, while sterling remained under pressure despite higher UK gilt yields and expectations of further Bank of England tightening.

Mixed UK economic data and uncertainty over whether the Bank of England would deliver the rate increases priced by markets also weighed on the pound.

As a result, the euro gained 0.37 per cent against sterling to 0.8606.

Nsubuga said the euro and pound would remain sensitive to US interest-rate expectations and energy prices, with monetary policy signals from the ECB and Bank of England likely to remain important drivers of the two currencies.

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