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A Ugandan budget deficit arising from European donor countries cutting aid could hurt the Ugandan shilling in the coming week while the Kenyan shilling is expected to strengthen as foreign investors buy its government securities. Commercial banks quoted the currency of east Africa's third-largest economy at 2,570/2,580 to the dollar, unchanged from last Thursday's close.
Uganda expects direct budget support to drop by 93 percent in the next financial year, which begins on July 1, after western donors cut their aid, angry at the alleged theft of some of the funds by government officials. "In the next one week we might see the shilling cross the key psychological level of 2,600 although it's unlikely to trade above 2,615."
The local currency is up 4 percent in the year to date but is expected to weaken in the medium to long term, sapped by jitters over aid cuts even though the central bank's cautious monetary policy stance has provided a measure of support. The Kenyan shilling is seen firming in coming days as foreign investors sell dollars to pay for their bond purchases during this week's oversubscribed auctions.
The central bank auctioned five- and 15-year bonds worth a total of 25 billion shillings ($298.51 million) on Wednesday. It received bids worth 56.6 billion shillings and accepted 35.8 billion shillings. "Most of these bids were from offshore people looking for good rates in Kenyan debt," said Robert Gatobu, a trader at Bank of Africa. "The shilling could firm on these flows."
The shilling has firmed 2.9 percent so far this year, mainly due to the calm presidential vote, to 83.65/85 per dollar on Thursday. The Tanzanian shilling is likely to stabilise or even slightly strengthen next week as mining companies are expected to sell dollars to get the local currency ahead of obligations that fall due in the coming days. Traders in Tanzania's commercial capital Dar es Salaam quoted the shilling at 1,625/1,635 to the dollar on Thursday, little changed from 1,626/1,636 a week ago.
"We expect the shilling to continue to stabilise or appreciate marginally in the coming days. This is because many corporates, particularly mining companies, are looking for shillings to pay taxes and salaries at the month end," said Theopistar Mnale, a trader at Tanzania Investment Bank. Market participants said they expect the shilling to trade in the 1,620-1,630 range over the coming days. Ghana's cedi could weaken against the dollar next week on increasing greenback demand, unless the central bank increases dollar sales to the interbank market, traders said.
The local currency was stable on Thursday at 1.9640/75 after sliding to an eight-week low on Tuesday, mainly due to increased dollar demand. "Unless we see a robust action from the central bank, the local unit could further weaken next week," Christopher Nettey of Stanbic Ghana said. The Nigerian naira is seen strengthening next week with as major energy companies sell dollars at the end of the month, traders said.
The local currency fell to 159 to the dollar on Thursday, its lowest in more than eight months. "We see the naira recovering some of the losses next week on the back of month-end dollar sales by some oil companies and a possible direct intervention in the market by the central bank to defend the currency," one dealer said. The Nigerian naira has been under pressure in recent weeks due to strong dollar demand from importers and investors recouping dividends and proceeds of bond sales as yields dropped in the local debt market.

Copyright Reuters, 2013

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