Kenyan Currency's Resilience Shows Cracks Amid Political Crisis

(Bloomberg) -- Kenya’s shilling weakened the most in more than six months on Monday, as warning signs started to flash for a currency that has, until now, been resilient in the face of a political crisis that shows little sign of abating.

The currency of East Africa’s biggest economy has climbed 2.1 percent this year, reaching its strongest level since June 2016 and posting five straight weeks of gains even as a basket of emerging-market currencies declined amid a global stocks selloff. The shilling fell 0.3 percent by 1:26 p.m. Monday in Nairobi to 101.10 per dollar.

That rise had sent the dollar’s 14-day relative strength index versus the shilling plunging to 6.3 last week, 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. It rose on Monday to 22.6.

The currency’s price-swings are increasing. Its one-month historical volatility, while low relative to major emerging-market currencies such as South Africa’s rand, has spiked to the highest in more than a year.

Exotix Capital said in a note Thursday that the shilling was, along with the Pakistani rupee and Omani rial, the most vulnerable of the frontier-market currencies it covers. Hasnain Malik, a Dubai-based 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.

Even stock investors have stayed bullish. Though the FTSE NSE Kenya 25 Index dipped 0.7 percent to 228.31 points on Monday, it’s still near 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 Ltd., an adviser to companies and wealthy individuals.

Kenya’s Eurobonds have also weakened, with yields on the government’s 2024 Eurobonds climbing almost 100 basis points to 6.38 percent in the past month. Kenyan spreads have proved more resilient. They are still around all-time lows and half levels from mid-2016.

That will help the government, which is starting a roadshow this week as it looks to sell as much as $3 billion of Eurobonds, according to a person familiar with the matter.

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.

To contact the reporters on this story: Paul Wallace in Lagos at pwallace25@bloomberg.net, Adelaide Changole in Nairobi at achangole2@bloomberg.net.

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Robert Brand, John Viljoen

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