As Kenya’s shilling appreciates in spite of a political crisis that shows little sign of abating, warning signs are starting to flash. The currency of Kenya, East Africa’s biggest economy rose 0.9 percent last week to 100.8 per dollar, a fifth straight week of gains and its best streak since 2015. It’s now near its strongest level since June 2016.
That rise has sent the dollar’s 14-day relative strength index versus the shilling plunging to 8.9, near its lowest in more than a decade and well below the level of 30 that some technical traders see as a signal it’s oversold.
As Kenya’s currency gets stronger, the currency’s intraday price-swings are rising. Its 24-hour historical volatility spiked to the highest since the beginning of 2017 on Thursday.
Exotix Capital said in a note the same day that the shilling was, along with the Pakistani rupee and Omani rial, the most vulnerable of the frontier-market currencies it covers. Hasnain Malik, an Exotix analyst, said the shilling was overvalued relative to its real effective exchange rate and cited Kenya’s widening current-account deficit as a concern.
Stock investors are also staying fairly bullish. The FTSE NSE Kenya 25 Index climbed 0.2 percent by 10:10 a.m. in Nairobi to 228.31 points, almost a record high.
Equities have more or less risen steadily since Kenya’s election re-run in October, even though the main opposition alliance has refused to accept defeat. On Jan. 30, it held a mock ceremony to swear in its leader, Raila Odinga, as the “people’s president.” President Uhuru Kenyatta’s administration retaliated by arresting opposition officials and closing down some television channels.
“The media crackdown will be ignored because the markets have discounted the opposition’s asymmetric strategy to close to zero,” said Aly-Khan Satchu, head of Nairobi-based Rich Management, an adviser to companies and wealthy individuals. Kenya’s Eurobonds have also proved resilient, thanks in part to investors craving the higher yields that emerging markets offer. While Kenya’s 2024 dollar yields have risen around 60 basis points since early January, its spread over U.S. treasuries, which have more than halved since mid-2016, is still near all-time lows.
That will help the government, which is in a rush to sell as much as $3 billion of Eurobonds in the next two months.
Foreign investors’ bullishness is largely down to their belief that political tension will wane, growth will accelerate and interest-rate caps, which have dented the banking sector, will be removed, according to David Willacy, a foreign-exchange trader at INTL FCStone Ltd. in London.
Still, “I would not be a surprised if we see a small retrace in the shilling, or even if we see the central bank coming in to buy dollars, since this can be an opportunity to build reserves,” he said.
This article was originally published on www.bloomberg.com viewed 12th February 2018.