The Ugandan shilling held steady against the dollar on Monday as preparations by companies for mid-month tax payments depressed greenback demand, and traders said a Treasury bill auction this week could give the currency a boost.
The Bank of Uganda (BoU) is due to sell 120 billion shillings ($48.7 million) of Treasury bills on Wednesday and some traders expect significant foreign investor participation on the back of relatively high yields.
At 0747 GMT commercial banks in Kampala quoted the currency of Africa's largest coffee exporter at 2,460/2,470, a touch stronger than Friday's close of 2,465/2,475. "Around this time demand for the dollar slows down because corporates are preparing to pay mid-month taxes," said Faisal Bukenya, head of market making at Barclay's Bank Uganda.
"So the shilling is getting some stability from that, but generally economic activity appears to be slowing and it's echoing in foreign exchange market through low dollar demand."
Uganda's economy contracted 2.3 percent in the final three months of 2011 from the previous quarter and shrank 1.1 percent from the same period a year earlier, the statistics office said in March.
The BoU held its benchmark lending rate at 21 percent in May for the second month in a row despite a fall in inflation.
Although Uganda's consumer price index declined to 20.3 last month from a revised 21.1 percent in March, the central bank said it was leaving its rate unchanged because of lingering risks of high food costs and an uncertain oil price outlook.
"The yields on Ugandan securities are still comparatively attractive and I expect offshore investors to participate in the auction which should firm up the shilling," said Shreedh Aran, head of treasury at Diamond Trust Bank.
At the last auction on May 2 the 91-day paper returned a weighted average yield of 18.0 percent down from 18.1 percent at the previous auction.