2 December 2012

Uganda: Will the Shilling Recover Soon?


In the week ending November 30, 2012, the shilling traded in a very volatile fashion. Volatility came amid a deterioration in market sentiment coupled with elevated demand from importers, energy sector i.e. oil companies and position cutting by offshore investors.

The shilling breached the resistance level of 2,700 and this triggered Bank of Uganda intervention action. However, the intervention did not reverse the trend and the shilling continued to slide.

The outlook remains bearish as several factors including a weak balance of payment position, external aid cuts, DR Congo political developments and the impending gay legislation continue to weigh down the shilling.

Markets are also keenly looking at BoU Central Bank Rate decision expected early this week for possible signals. The decision will be crucial in setting the tone following the indication in the November MCP statement that BoU will tolerate a weaker shilling. Expected trading range is 2700/2725 levels in the early part of this week.

Stephen Kaboyo is the Managing Director at Alpha Capital Partners.

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The Uganda shilling is forecast to stabilise as the high US dollar demand from importers, which sent the local currency tumbling to a 13-month low in recent days, starts to recede. At the end of the week, commercial banks quoted the UGX at 2,675/2,785, weaker than last week's close of 2,640/2,65, but better than the intra-week low of 2705/15 hit on Wednesday.

A combination of soaring greenback demand from importers and offshore investors has pressured the shilling over the last two weeks, prompting the Central Bank to intervene several times to stem the fall. In separate news, headline inflation in Uganda rose year-on-year for the first time in eight months in November, to 4.9 percent from 4.5 per cent.

Analysts said the rise might have been fuelled by shopping for Christmas and New Year celebrations and would probably prove short-lived, with few implications for the Central Bank policy. Consumer prices also increased by 0.5 per cent month-on-month.

The Bank of Uganda is expected to announce its latest decision on the benchmark Central Bank Rate (CBR) on Tuesday. This month the Central Bank cut its key rate by only 50 basis points rather than a widely expected 100 basis points, a decision analysts said reflected the Central Bank's fears that further aggressive easing of its policy stance would hurt the local currency.

Analysts are split between a 'hold' decision (in light of recent UGX weakness) and a 50-basis cut as core inflation remains below the policy target of 5% while growth remains relatively weak.

Dickson Magecha is a Forex Trader, Financial Markets at Standard Chartered bank.

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