The currency opened the week trading at 3655/3665 levels though quickly lost against the greenback to 3660/3670 and touched lows of 3670/3680 on the back of Corporate demand predominantly in the Energy and Manufacturing sector.
There were some dollar inflows mainly from the agri-commodity and diaspora remittances throughout the week, however, this was not significant enough to outweigh the demand seen in the early part of the week.

Markets quieted down in the latter part of the week with activity almost evenly matched across dollar demand and dollar inflows albeit at much smaller levels as most Corporates kept out of the week to settle tax obligations towards the end of the week. The shilling closed the week trading at 3665/3675. We anticipate the resumption of market activity next week with demand expected to flow through post-tax payments.
However, our view is that this demand should be evenly matched with dollar inflows and we see the trading range between 3650 – 3685. Our year-end expectations remain tagged to a strong shilling buoyed by expected pick up in Agri-commodities like Coffee (start of the Robusta crop) and Cocoa whose main seasons are expected to begin mid-November to about March/April. Additionally, we remain watchful over interest rate cuts from Central Bankers across the globe, especially the US Federal Reserve to see if this may drive off-shore investors interested in Uganda government securities into the market. We remain within the 3630 – 3700 range throughout the rest of the year.

Money markets still had tight liquidity during the week with overnight yields averaging at 11.50%. Bank of Uganda will hold a Treasury Bill auction on Wednesday next week with an auction size of UGX 355 billion. Anticipated coupon payments next week may improve liquidity in the market and we may see stability in next week’s auction on the back of this.

US inflation data out this week showed headline inflation at 2.6%. Core inflation increased 0.3% for a third month to print at 3.3%. The Fed Chair has hinted that with the US economy’s performance, they may have room to lower interest rates at a slower pace, a sentiment that has been echoed by his colleagues.

This sentiment indicates that a December rate cut may be on hold given that inflation is not yet at the targeted 2% mark. Monetary policy may face crosswinds in the next year if President-elect Donald Trump fulfills campaign promises to cut taxes, restrain immigration, and deploy tariffs. Policy uncertainty may also be contributing to the Fed’s dovish stance on further rate cuts right now.

A growing economic gap between the US and Europe threatens to further weigh on the single currency. Donald Trump’s victory strengthened the dollar while spurring a slide in the euro. Euro briefly fell below $1.05 in Thursday’s trading touching its weakest level in more than a year. Europe’s largest economy, Germany was tipped into a political crisis last week which, coupled with weakness in its manufacturing sector and growing challenges for its car industry, does not bode well for the single currency. However, momentum has currently slowed in Friday’s early afternoon trade and the currency traded at $1.0570.

By Rahmah Masagazi, Head of Sales – Global Markets Absa Bank Uganda