Uganda shilling slips, expected to gain ground in days ahead

Wednesday, 21st September, 2011

The Uganda shilling sagged against the dollar yesterday, reflecting global worries about the euro zone debt. But traders said the local currency could firm if there was strong interest in a Treasury Bill auction today.

The Bank of Uganda (BoU) is slated to auction sh90b (about $32m) worth of Treasury Bills of 91-, 182- and 364-day tenors. The yields are expected to rise on the back of a tightening monetary policy.

Commercial banks in Kampala quoted the shilling at 2,790/2,800, weaker than Monday’s close of 2,775/2,785. "Investors are unnerved by the inauspicious developments in the euro zone," said Raymond Mutibwa, the head of rates and credit trading at Standard Chartered Bank.

"The negative sentiment is getting around to the local market and is hitting the shilling."

After a relentless slide against the US currency for much of this year, the shilling has hovered around 2,800 over the last few weeks and analysts said this remains a key psychological level.

The Uganda currency hit its all-time low of 2,828.25 against the dollar on August 31.

"We think there will be significant offshore interest in tomorrow’s (today’s) Treasury Bill auction and it might give the shilling a firm footing," Mutibwa said.

The Bank of Uganda has been hiking yields on its debt as it escalates efforts to reverse runaway inflation which jumped to 21.4% in August, its highest level since February 1993, from 18.8% in July.

BoU has said it expects higher interest rates to attract more offshore interest in its securities.

"Although the shilling has faltered a little, I don’t see it plummeting in the style of months ago. It will play around 2,800, supported by the Central Bank’s tight monetary policy," said a trader with a leading commercial bank.

Reuters