January 13, 2015

Uganda Shilling Remains Weak Despite BoU Intervention

Although Bank of Uganda (BoU) intervened in the market on the buy side and verbally last week, the local unit (UGX) just gained slightly, with Friday trading closing at 2835/45.

A trader displays Uganda Shilling notes. IMF says there is likelihood of exchange rate depreciation as has already been observed in South Africa, Nigeria, Ghana and Zambia.

Analysts described BoU’s move as a surprise as the Central Bank was busy buying dollars almost at the end of the trading session on Friday.

The demand for dollars is largely from Telecommunication, Manufacturing and energy sectors.

Stephen Kaboyo, Managing Partner at Alpha Capital Partners, an indigenous financial consultancy firm said, “It appears BOU is desperate to build reserves at any cost.

The full impact of this is likely to filter through at opening rates next week.”

He added that: “Under the current market conditions, BOU intervention can only slow the decline but not reverse the trend.

The demand remains up and market players are picking up every available dollar on the market, literally playing safe, unsure of where the currency will be going next.

The implication of this is that the depreciated shilling will exert pressure on import sector, raising concerns of a surge in prices and thereby driving inflation.”

BoU noted that whereas the US dollar continues to strengthen globally and local demand for dollars with the resumption of business continues to pick up after the festive season, “some speculative tendencies”   have exacerbated the depreciation of the Ugandan shilling.

The Bank said it will take measures to tame the depreciation arising from the speculative tendencies.

James Mutuku, Head, Financial Markets, Standard Chartered Bank said, “We expect the depreciating tone to remain though the Central bank highlighted in their press statement on Thursday that it will be keen to ensure stability.   Expected trading range is UGX2830-85 in the coming week (this week).”

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