Uganda shilling falls, seen staying under pressure- Importers Implicated

26-March-2012

KAMPALA - The Ugandan shilling weakened against the dollar on Monday, weighed down by demand for the U.S. currency in the interbank market, and traders expected month-end demand for dollars from importers would keep up pressure on the shilling.
The shilling has been under pressure this month since the central bank unexpectedly cut interest rates despite high inflation above 25 percent.

At 0831 GMT commercial banks in Kampala quoted the shilling at 2,500/2,510, from Friday's close of 2,485/2,495.

"We still see it remaining under pressure this week because of expectations of month-end demand from importers," said Peter Mboowa, trader at KCB Uganda.

The shilling is down 1.8 percent against the dollar this year. It hit a 2012 low of 2,620 on March 6 a few days after the central bank cut its key policy rate for this month, for a second month in a row, despite high inflation.

The bank trimmed 100 basis points off its benchmark rate for March, from 22 percent in February.

Ugandans have protested against the high cost of credit, putting the bank under pressure to cut rates. The bank has said inflation should fall to single digits by the end of 2012, partly because money supply growth has slowed sharply, but investors are not convinced.

However, analysts say a recent rebound in yields on Ugandan debt, which had been sliding for weeks, could prompt a return of offshore investors to the bond market, providing support to the shilling.

Treasury bill yields rose for the first time in weeks at an auction on March 21 with the yield on the 91-day paper edging up to 17.4 percent from 17.2 at the previous sale.

The central bank is scheduled to auction 100 billion shillings worth of Treasury bonds on Wednesday and traders said the market was keenly watching the auction for signs of the return of offshore investors.

"Corporate demand this week is largely expected to keep the shilling inclined toward weakening," said a trader from a leading commercial bank.

"But if offshore participation is significant we could see it (shilling) trade stable at around 2,480."

Reuters