THE shilling continued with a steady recovery against the dollar last week due to increased inflow of US dollars and its diminishing demand in the market.
Traders say they expected the local currency to gain some ground in coming days with the beginning of the harvesting season of food and cash crops and continuing decline of corporate demand for the dollar that had pushed it down.
At the close of business last Friday the local currency was quoted at the mean average of 1,608/- for the greenback from 1610/- from on the previous day.
According to Standard Chartered Bank, the shilling continued to gain against the dollar by Thursday on the back of increased inflows and declining dollar demand in the market.
It further strengthened against the dollar on Friday thanks to increased demand for the local currency in the market. The bank's analysts say they expected the shilling to further strengthen and the pair to trade at the same level.
"There is a bit more liquidity in the market and that is putting pressure on the shilling," said Nahashon Mungai, a trader at KCB Bank, adding that banks were also closing off their positions ahead of the weekend.
The yield on the benchmark 91-day Treasury bills tumbled to 9.727 percent at Thursday's auction from 11.408 percent at last week's sale, pointing to an abundance of liquidity in the money markets.
The shilling has been stuck in a band of 87.20-88.00 in recent weeks with positive factors like higher foreign exchange reserves balanced by worries over a spate of attacks blamed on Islamist militants.
In another development, the Ugandan shilling was little changed on Friday but was seen weakening due to dollar demand from telecom firms although tight shilling liquidity was expected to cushion any fall. At 0946 GMT commercial banks quoted the shilling at 2,665/2,675, a notch weaker than Thursday's close of 2,663/2,673.
"The market is still receiving significant demand from telecom firms which is keeping the shilling downward," said Faisal Bukenya, head of market making at Barclays Bank Uganda. The shilling has been under pressure in recent days from dollar demand by firms in the telecommunications and energy sector looking for hard currency to pay dividends.
The central Bank of Uganda was forced to sell an undisclosed amount of dollars to support the shilling, which has lost 5.4 percent against the dollar in the year to date.
Traders said confidence in the local currency was also being sapped by falling yields on government securities that are slowing offshore investor appetite.
Bukenya said the central bank had mopped up excess liquidity on Friday, triggering a liquidity squeeze with overnight interbank borrowing fetching rates between 9-12 percent from between 6-9 percent two days ago.
"I think the next key factor the market is eyeing keenly is next week's bond auction," said Sage Daniel Muganza, trader at Centenary Bank. A total of 180 billion shillings ($70 million) worth of two and five-year Treasury bonds are up for sale at the auction.
"The shilling depreciation could accelerate faster if rates go down further," he said. Muganza said the local currency would be supported at 2,690 while its resistance was at 2,660.
The shilling's 14-day and 50-day weighted moving averages also point to a weakening trend for the currency in the near term. On Thursday, shilling eased to 2,667, close to its February 2013 low of 2,670, according to Thomson Reuters data.
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