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UPDATE 2-Uganda shilling weakened by speculators
January 21, 2011 / 10:34 AM / 7 years ago

UPDATE 2-Uganda shilling weakened by speculators

* Central bank sold $45.3 mln this week

* Forex reserves at $2.8 bln as at end December

(Recasts, adds details, quotes)

By Elias Biryabarema and Barry Malone

KAMPALA, Jan 21 (Reuters) - The Ugandan shilling's UGX= sharp depreciation was due to offshore speculators and the central bank said on Friday it would limit the impact of their activity through aggressive intervention.

The shilling sank to an all-time low of 2,395/2,400 per dollar earlier this week as importer demand for dollars rose and both corporates and aid agencies held on to their greenbacks ahead of a presidential election on February 18.

It rallied to 2,310/20 per dollar from a low of 2,352/57 in earlier trade on Friday after central bank intervened by selling dollars.

“When you look at the fundamentals now and going forward, you see that actually the current foreign exchange levels are not reflecting the fundamentals but are reflecting market psychology, the animal spirits,” Bank of Uganda’s (BoU) director of research, Adam Mugume, told a news conference.

“When you go into the market you’re trying to make sure that you don’t allow these animal spirits from the offshore to direct the exchange rate. So BoU is trying to control offshore activity in the foreign exchange market.”

Central bank said the shilling had been correcting after an undervaluation averaging about 4.4 percent between July and December 2010.

The bank has intervened with $45.3 million so far this week to cushion the shilling, according Mugume, and has sold a total of $85 million since July last year.

BoU’s foreign reserves stood at $2.8 billion, or 5.15 months of imports, as at December 2010, he said.

One analyst said the shilling strength was sapped by an interplay of factors and market fundamentals such as declining exports receipts.

“It’s a range of factors, Uganda’s export earnings have been dropping, there’s panic buying in the market and others,” Nicholas Malaki, head of PineBridge Investments, told Reuters.

Although the shilling gained significant ground after the central bank beefed up supply the impact would be fleeting and the rate was likely to drop again, Malaki said.

The shilling depreciated an average 15.4 percent year-on-year between July and December 2010 and by 21.5 percent against the dollar in December 2010, according to central bank.

Forex traders said the three central banks interventions this week had calmed down the market and that they expected the shilling to appreciate further and test the 2,300.00 level.

“The central bank seems to be intent on supporting the local unit. The interventions have had a big impact. The central bank seems to be very serious now, consistently coming in. We expect to go beyond 2,300 if they continue to come in,” said Faisal Bukenya, head of market making at Barclays Bank Uganda. (Editing by Helen Nyambura-Mwaura; Editing by Ron Askew)

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