Upstick in demand but Shilling trades sideways
The shilling traded sideways staying below its primary descending resistance level of 3785. There was an uptick in demand that temporarily resulted in a 25-shilling dip as market players covered short positions.
Relatedly, BOU reserves continue on the down trend amid low external funding and external debt servicing, with projections indicating higher debt service costs.
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While BOU’s strategy is to build reserves through purchases of dollars in the market, this time around, the Central Bank is constrained to buy meaningful amounts due to the prevailing market conditions.
In the government treasuries, yields held flat in a 235 billion auction. BOU rejected outlier bids and raised far less than what was planned.
Looking ahead, the maturity profile indicates large upcoming redemptions. According to Alpha Capital, It is therefore likely that the fiscal authorities will consider an unscheduled bond in order to deal with the expected overhang.
Stephen Kaboyo the Managing Director at Alpha Capital says that “another key factor that is likely to unsettle the fixed income market is the cumulative tax revenue shortfall that is standing at about 1.3 trillion. “
Managing that revenue gap may require issuance of more domestic debt which will in turn exert upward pressure on interest rates.
Going forward, the shilling is likely to drift sideways. Tight liquidity conditions in the market will be a key factor in keeping forex demand at bay.
