Shilling weakens as dollar demand, global tensions weigh on market

The Uganda shilling lost further ground during the week, weighed down by strong demand for hard currency from local market players and offshore investors, as well as renewed geopolitical tensions in the Middle East.

The local unit closed the week trading at 3690/3700, weaker than the opening levels of 3670/3680. Despite the depreciation, analysts project the shilling will trade within a broader range of 3600–3720 in the near term, supported by continued central bank interventions and liquidity conditions.

Richard Nsubuga, acting head of trading at Absa Bank Uganda’s CIB Markets, said the money market remained awash with liquidity, with overnight and one-week lending rates averaging between 6.75 per cent and 10.00 per cent.

The Bank of Uganda maintained its liquidity management operations during the week, mopping up excess funds through the sale of treasury bills and conducting a seven-day repo operation to stabilise the market.

In the government securities market, the central bank conducted its second Treasury bond auction of the financial year, reopening the benchmark three-year, 10-year and 20-year tenors with a total offer size of Shs 990 billion.

Investor appetite remained strong, buoyed by ample liquidity and reinvestment flows from recently paid bond coupons and maturing securities. The benchmark bonds cleared at yields of 12.40 per cent for the three-year, 15.45 per cent for the 10-year and 15.95 per cent for the 20-year.

Overall, the auction recorded allocations worth Shs 1.035 trillion, representing an acceptance rate of 104.5 per cent, an indication of sustained investor confidence in government paper. The Bank of Uganda is expected to return to the primary market on July 29 with another auction, where the two-year, five-year, 15-year and 25-year bonds will be reopened.

Regionally, the Kenyan shilling remained relatively stable, with the USD/KES pair trading within the 129.00–129.50 range amid balanced liquidity conditions. The currency is expected to trade between 129.20 and 129.90 in the coming sessions as month-end flows come into play.

On the global front, financial markets were rattled by escalating tensions between the United States and Iran, raising fears of potential disruptions to oil supply. Brent crude prices climbed towards $85 per barrel, posting a weekly gain of about 12 per cent.

Market sentiment was further shaken after reports of U.S. strikes on Iranian targets, including an incident involving an oil tanker near a key export hub. The developments heightened concerns about possible supply shocks in global energy markets.

The dollar index steadied near 100.7 during the week but remained on track for a weekly loss, following weaker-than-expected U.S. inflation data that dampened expectations of further interest rate hikes by the Federal Reserve.

At the same time, the geopolitical tensions kept inflation risks in focus, as higher oil prices could sustain price pressures globally. Data released during the week showed U.S. consumer inflation rising less than anticipated in June, while producer prices unexpectedly declined, signalling easing underlying inflationary pressures.

In Europe, the euro climbed above $1.145, nearing its highest level in a month, supported by expectations of further monetary tightening by the European Central Bank. The British pound also held firm above $1.35 after data showed the UK economy returned to modest growth in May.

Meanwhile, gold prices traded below the $4,000-per-ounce mark and were on course for a weekly decline of more than 3 per cent, as rising oil prices and shifting interest rate expectations weighed on the precious metal.

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