NAIROBI: The Kenyan shilling weakened early on Monday, dragged down by energy sector importers buying dollars, and traders said lower interest rates in the market could weigh on the local currency further.
At 0703 GMT, commercial banks quoted the shilling at 84.45/65 per dollar, 0.2 percent weaker than Friday's close of 84.30/50.
"There is pent up demand (for dollars) as we approach end month, mainly from the energy guys. The shilling will remain under pressure for now," said Julius Kiriinya, a trader at African Banking corporation.
"If the shilling crosses 85.00 the central bank may come in with repos and even direct sale of dollars to support it."
The central bank has been actively intervening in the foreign exchange market this year by occasionally selling dollars directly to commercial banks and regularly mopping up excess liquidity via repurchase agreements (repos).
Traders said lower interest rates in the wake of a record 3.5 percentage point cut in the key central bank rate on Sept. 5 could also pressure the shilling lower. The cut turned round months of relatively tight monetary policy and brought rates down to 13 percent.
Typically, by making credit cheaper for importers and lowering the cost of commercial banks holding more dollars rather than shillings, low interest rates put the Kenyan currency under pressure.
An auction of Kenyan government debt last week was under-subscribed - yields on the benchmark three-month Treasury bill fell 29 basis points to 7.515 percent, while the six-month paper dropped to 8.993 from 9.351 percent previously.
"With interest rates coming down we expect the shilling to come down too. There is also excess liquidity in the market," said Solomon Alubala, head of trading at Co-operative Bank of Kenya.
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