Uganda Shilling Strengthens Against Dollar -16-April-2012

16-April-2012

The Ugandan shilling edged higher against the dollar on Monday, helped by a slump in corporate demand for dollars and market confidence that a Treasury bill auction this week will draw offshore investors.

At 0903 GMT commercial banks in Kampala quoted the currency of east Africa's third-largest economy at 2,495/2,505, a touch stronger than Friday's close of 2,500/2,510.

"Around this time of the month, corporates are paying their mid-month taxes, which limits their capacity to exert dollar demand so the shilling is gaining from that," said David Bagambe, a trader at Diamond Trust Bank.

He said the market was also anticipating demand for the shilling from foreign investors participating in a Treasury bill auction on Wednesday.

KCB Uganda said in a market report that yields at the 120 billion shilling ($47.9 million) auction were likely to inch up amid relatively tight liquidity conditions.

At the last auction on April 4, the weighted average yields on 91-day paper climbed to 18.1 percent although rates on 182 and 364-day bills dropped slightly.

The shilling has been underpinned by Bank of Uganda (BoU)'s decision to halt its policy easing cycle this month, which means yields on Ugandan debt are still relatively attractive and should spur offshore investor demand, analysts said.

After cutting interest rates for two consecutive months, BoU kept its benchmark rate at 21 percent this month despite a steep fall in inflation, partly because it wanted to prop up the currency. The central bank also cited persistent risks from high food prices for keeping rates on hold.

"We might see a further strengthening of the currency if we witness inflows from offshore for the Treasury bill auction this week," said Stanbic Bank in a market report.

A surprise rate cut last month triggered a sharp fall of the shilling which hit a 2012 low of 2,620 on March 6 before regaining some strength.

by Yara Bayoumy and Susan Fenton: Reuters