Ugandan shilling at 8-month low, due to dollar demand

The Ugandan shilling has weakened to an eight-month low due to increased demand for dollars from commercial banks seeking to cover short positions in the dollar. Last week, the Bank of Uganda raised $47.9 million in an oversubscribed T-Bill auction, reflecting the current trend in the market. Salima Nakiboneka, the Head of Research and Fixed Income at Crested Capital, shed light on the situation during a recent interview on CNBC Africa. Nakiboneka explained that the oversubscription of the auction signals a shift in preferences for commercial banks, moving from lending deposits to investing in treasury bills. However, she noted that while last week's auction was oversubscribed, the subscription levels were lower compared to previous quarters. The slowdown in the auctioning and government securities market could have implications for the shilling's stability. Nakiboneka highlighted that as the demand for government papers slows down, there may be fewer foreign currency inflows, putting pressure on the local currency. With traders gearing up for the festive season in December, the need for foreign currencies is driving the current demand for dollars, contributing to the shilling's depreciation. Looking ahead, Nakiboneka anticipated that the Central Bank rate might see a further reduction of at least 50 basis points from the current 14%. With inflation still below target and economic activity gradually recovering, the Central Bank is likely to consider additional cuts to support the economy. However, the rise in food inflation remains a factor that policymakers will need to monitor closely. The continued surge in demand for dollars to cover short positions is expected to keep the Ugandan shilling under pressure in the coming weeks. Nakiboneka suggested that the currency trading might remain fragile throughout October and into mid-November as traders position themselves for the upcoming months. As the festive season approaches, the need for foreign exchange is likely to drive further fluctuations in the exchange rate. In conclusion, the situation in the Ugandan currency markets remains uncertain as the shilling grapples with external pressures and shifting investor sentiments. With the Central Bank expected to make policy adjustments in response to economic indicators, market participants will closely monitor developments in the coming weeks to gauge the shilling's trajectory.