31 July 2012

Uganda: Shilling Awaits July Inflation Data

The July inflation figures set for this week will determine whether the shilling starts to appreciate after stabilising on Friday.

Demand for the dollar waned on Friday as the shilling closed at 2,475/85 buying and selling respectively from lows of 2,480/90 early in the weeek.

"The pickup in dollar demand that we have seen over the last two days has come off and driven the shilling up again," said Faisal Bukenya, the head of market making at Barclays Bank.

The shilling has been oscillating in the 2,460 to 2,500 range for about three months, but analysts say the ongoing cycle of monetary policy easing is likely to put it on the ropes over the next several months. Bank of Uganda has so far cut its benchmark Central Bank Rate for two straight months - it now stands at 19% - and signalled it is prepared for further policy loosening to stimulate slowing economic growth. A pick-up in economic activity would potentially spur an upsurge in dollar demand and weaken the local currency for the import-dependent economy.

Dennis Mashanyu, a forex trader with Standard Chartered Bank pointed out that government treasuries firmed by about 110 basis mid-last week after the auction points, as the shilling weakened slightly.

"The market continued to trade on small volumes with major players still not showing sizeable interest (in government treasuries)," he said in his weekly market notes.

"Renewed offshore interest was seen as they position their portfolios ahead of further expectations of easing by policy makers in the coming days," he explained.

Mashanyu said the shilling is likely to remain in the range of 2,470-90, waiting on the inflation data on tomorrow and the Central Bank Rate decision for clear direction. "Liquidity is expected to improve during the week with no primary auction which might see cash markets trade near single digit," Mashanyu said.

Analysts predict low food prices are likely to cool inflationary pressures again and give the Central Bank room for further policy easing. Market players also say typical end of month dollar conversions by charities looking to pay salaries might lend the local unit slight support.

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