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Uganda shilling down against the US Dollar 23-April-2012

The Ugandan shilling inched lower on Monday, weighed down by demand for the dollar from banks and the energy sector with market players expecting the local currency to tumble further on companies currency needs at the month-end.

Bank of Uganda (BoU)'s decision to hold off on further cuts in interest rates this month has largely stabilised the shilling which plunged to a 2012 low of 2,620 last month after a surprise rate cut and a slump in debt yields.

Traders said dollar inflows from offshore investors seeking to participate in this week's Treasury bond auction would lend the shilling some support this week.

But at 0953 GMT commercial banks in Kampala quoted the currency of Africa's largest coffee exporter at 2,510/2,520, a notch weaker than Friday's close of 2,505/2,515.

"(Dollar) demand in the interbank market and players in the energy sector has shaved some value off the shilling," said Faisal Bukenya, head of market making at Barclays Bank.

Despite a steep fall in inflation, the central bank held its key lending rate at 21 percent this month from March, citing persistent risks to inflation from high food prices and a weak shilling.

"Market sentiment points towards a weaker shilling on the back of month end corporate demand," said a market brief from Stanbic Bank.

"However, having a Treasury bond auction that is expected to attract some portfolio flows ... might cushion the anticipated demand."

The central bank is scheduled to sell 100 billion shillings ($39.74 million) worth of 3-year Treasury bonds on Wednesday and some market analysts say yields may rise.

With a weak export base, Uganda relies significantly on foreign investors buying its debt to support its currency against the dollar.

Ahmed Kalule, a trader at Bank of Africa said ongoing clashes between South Sudan and its northern neighbour and long-time foe Sudan is also hurting confidence in the shilling.

Landlocked South Sudan imports much of what it needs from Uganda and other east African neighbours and an outbreak of war or widespread fighting is certain to hit the shilling as dollar earnings from such trade drop off.

Reuters: 23-April-2012

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