Uganda shilling recovers against US Dollar after yields rise at T. Bill auction

18-April-2012

A rise in yields on Treasury bills spurred a recovery of the Ugandan shilling against the dollar on Wednesday due to expectations of inflows from offshore investors who participated in the auction.

The weighted average yields climbed across all tenors at an oversubscribed Treasury auction worth 120 billion shillings ($47.7 million) on Wednesday, with the 91-day paper edging up to 18.1 percent from 18.0 at the last sale.

At 1126 GMT commercial banks quoted the currency of east Africa's third largest economy at 2,510/2,520, after pulling back from a low of 2,517/2,527 where it stood before the auction results were announced.

The local currency closed Tuesday at 2,505/2,515.

"With the across-board rise in yields the market expects (there was) substantial participation of offshore investors," said Brenda Akumu, a trader at KCB Uganda.

"So the shilling is riding on expectations of improved (dollar) supplies as those offshore guys convert their dollars to pay up for their successful bids."

The auction results were largely in line with forecasts from analysts, who said a slight uptick in yields was possible on the back of the central bank's recent move to at least pause with its cycle of monetary policy easing.

Despite a steep fall in inflation, Bank of Uganda (BoU) this month left its key lending rate unchanged at 21 percent from March, citing worries about pressure on the local currency and still-high food prices.

A slump in yields last month and an unexpected rate cut triggered a plunge of the local currency to as low as 2,620 - its lowest this year. Players say that pressure remains present in the market.

"Although the shilling has rallied, it's likely to be shortlived...otherwise the overall market sentiment is biased toward depreciation," said Faisal Bukenya, head of market making at Barclays Bank.

Another trader at a leading commercial bank said he expected dollar demand from importers over next few days to keep the shilling under pressure.

By Elias Biryabarema: Reuters