Uganda shilling down vs the US Dollar - 30 -March- 2012

30 -March- 2012

The Ugandan shilling edged down against the dollar on Friday on fears the central bank would further cut rates after a disappointing economic performance in the last quarter of 2011 and a sharp decline in March inflation.

The economy contracted 2.3 percent in the last three months of the past year from the previous quarter, while annual headline inflation dropped to 21.2 percent from a revised 25.7 percent in February, the statistics office said.

At 1125 GMT commercial banks quoted the shilling at 2,515/2,525, weaker than Thursday's close of 2,510/2,520.

"The outlook from today's data really is feeding a negative market sentiment and we've seen the shilling depreciate a little," said Dennis Mashanyu, trader at Standard Chartered Bank.

The central bank, which raised rates aggressively in the second half of 2011 to fight inflation and curb exchange rate volatility, is scheduled to set its benchmark Central Bank Rate (CBR) on Monday.

"Obviously the central bank is likely to feel pressure to cut its rate. Add that to the dropping yields and disappointing economic performance and I foresee further shilling weakening," Mashanyu said.

He said that while inflation had dropped sharply, a rate cut would cause yields on government debt to fall further and keep the shilling under pressure.

The shilling fell to its 2012 low of 2,620 on March 6 after policymakers unexpectedly cut the CBR rate for March to 21 percent from February's 22 percent against inflation of above 25 percent.

Analysts say high yields could keep attracting offshore investors, helping to prop up the currency.

The yield on the two-year Treasury bond dropped to 15.6 percent from 20.9 percent at the last auction in December.

The central bank was scheduled to sell Treasury bills of all tenors worth 120 billion shillings ($47.71 million) on Wednesday, and traders said they were keenly waiting to see the level of demand from overseas investors.

Reuters