Business Daily (Nairobi)
James Makau
14 May 2008
Favourable interest earnings from trading between the dollar and the local currency as well as foreign inflows for the Safaricom initial public offering will keep the shilling steady against the greenback, dealers said.
By mid-morning trading, commercial banks quoted the local unit at 61.60/70 compared with last Wednesday's close of 61.70/80.
The dealers said in early trade the shilling touched 61.30/40 before reversing.
"The shilling is unchanged at the moment. It has actually reversed ... from a high which it saw earlier in the morning, but it is generally quiet at this level," said Anthony Kirui, the head of market making at Barclays Bank.
Dealers said some buyers were attracted to the market when the shilling touched 61.30/40.
Dealers said they expect the local unit to trade in the 60.60-62.00 range against the dollar in coming days, with a strengthening bias.
The local unit has been gradually firming against the dollar in recent weeks, helped by subdued demand for the US currency, dealers said.
It has also been helped by commercial banks positioning themselves for foreigners bringing in dollars to buy shares in leading mobile phone service provider Safaricom, in which the Government is selling a 25 per cent stake.
Foreign investors have been allocated 35 per cent of the 10 billion shares on offer and will pay a 10 percent premium over the five shillings a share which local investors are expected to pay.
This means Kenya's money markets will receive a cash injection of Sh17 billion next month as foreign investors meet their obligations.
The Government is expecting to rake in Sh50 billion for the offer with recent reports on an oversubscription spelling good news for the Treasury.
The local unit is also being helped by the interest rate differentials (IRDs) between the US currency and the shilling, which has more favourable rates, prompting banks to hold the shilling instead of the dollar.
IRDs measure the gap in interest rates between two similar interest-bearing assets.
Traders in the foreign exchange market use IRD when pricing forward exchange rate.
Based on the interest rate parity, a trader can create an expectation of the future exchange rate between two currencies and set the premium (or discount) on the current market exchange rate futures contracts.
The IRD is a key component of the carry trade. Online financial investment encyclopedia, investopedia.com defines carry trade as a strategy in which an investor sells a certain currency with a relatively low interest rate and uses the money to buy a different currency yielding a higher interest rate.
A trader using this strategy attempts to capture the difference between the rates - which can often be substantial, depending on the amount of leverage the investor chooses to use.
The IRD is the amount the investor can expect to profit using a carry trade.
This profit is ensured only if the exchange rate between dollars and pounds remains constant.
The interest rate on the benchmark 91-day Treasury bill stands at 7.764 per cent from the latest auction on Thursday, from 7.837 per cent previously.
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