Summer holidays in west Africa should slow demand for the dollar, allowing the naira to gain some ground next week, while the usual month-end buying of local currencies is expected to buoy African units in general.
"This is the summer period and we expect demand for the dollar to be slow for a while because most buyers of forex have gone on holiday and there is little taking place," one dealer said. The naira has hovered around the 191.45-162.20 range in the last two weeks, supported by increased dollar flows from oil multinationals and offshore investors buying local debt. Energy companies operating in Africa's top crude exporter sell dollars at the end of the month to meet domestic obligations.
Zambia's central bank tightened monetary policy last month, halting a five-month decline in the kwacha, which has since rallied from a record low of 7.25 to the dollar in late May to around 6.11 this week.
"I am not seeing much demand from corporates so I would bet the shilling will play in a stable range," said Faisal Bukenya, head of market-making at Barclays Bank, who expected the currency to stay in a 2,620-2,650 band. "If the market receives a lot of month-end inflows some (shilling) gains are possible in the remaining part of July," he said.
The currency has lost 4.1 percent of its value against the dollar since the start of the year. But traders said the outlook was brighter, helped by a rise in local debt rates and a fairly upbeat economic report this month from ratings agency Standard and Poor's.
Traders said they expected the shilling to trade in a tight 1,650-1,660 range over the coming days. Dealers said the unit has been fluctuating within a narrow band since last week, but it could make some gains next week. "There is little pressure on the shilling as a result of thin demand for US dollars from oil importers and manufacturers," said Hamisi Mwakibete, head of trading at Commercial Bank of Africa in Tanzania. The Bank of Tanzania said on its website that it traded $55.3 million on the interbank market over the past week.
Traders said importers were sitting out of the market hoping for the shilling to strengthen before they buy dollars. "If it doesn't, they will just cover at where the market will be trading. So as long as there is that demand it is supportive of the dollar," a senior trader at one commercial bank said. Dealers expect the local unit to trade in a range of 87.70 to 88.20 in the coming sessions.