The Kenyan shilling tested the psychologically important Sh88 per US dollar level in early trading Tuesday, turning market attention to the Central Bank of Kenya (CBK).
The banking sector regulator had a day earlier said it was ready to defend the under-pressure currency against volatility.
Traders said persistent demand for dollars from corporate clients paying dividends to foreign shareholders and making routine month-end payments were weighing on the shilling.
On top of that, the recent spate of bombings in the country has shaken confidence in the local currency.
A convincing breach of the 88 level would likely herald further weakening, said Duncan Kinuthia, head of trading at Commercial Bank of Africa.
Central Bank signalled its intent to stem the shilling’s steady weakening by selling dollars on Friday and then saying it had sufficient foreign reserves to cushion the currency against shocks.
“They may come in and come in aggressively if they see further weakness,” Kinuthia said. “I expect them to be concerned if they see us approaching the 88.50 level.”
In the early morning trading, commercial banks priced the shilling at 87.85/88.05, barely moved from Monday’s close. The Central Bank’s Governor, Njuguna Ndung’u, blamed seasonal factors including the foreign dividend payments for volatility in the currency market over the past two weeks.
He did not mention the security challenges facing the country.
Prof Ndung’u said CBK has adequate foreign exchange reserves to cushion the shilling against temporary shocks that have left the local currency weakened.
He said the current level of foreign exchange reserves of $6.24 billion (Sh547b) is equivalent to 4.4 months of import cover, adding that the proceeds from the planned Eurobond will boost the reserves.
The bond’s value is estimated at $2 billion (Sh174 billion). “The current foreign exchange reserves are sufficient to provide adequate cushion against temporary shocks,” Ndung’u said in a statement on Monday.
Majority of or all listed companies have announced dividend payouts for the 2013 financial year. Barclays Bank Kenya held an Annual General Meeting last Friday and Standard Chartered Bank the previous day, with all announcing dividends.