The Uganda shilling lost further ground during the week weighed down by robust demand for hard currency from local market participants, offshore investors and renewed tensions coming out of the Middle East, according to Absa Bank Uganda’s weekly report.
The shilling closed the week trading at 3690 / 3700 levels compared to the week’s opening levels of 3670 / 3680. Despite shilling’s vulnerability, the local unit is still projected to trade within a wider range of 3600–3720 in the near term.
The market was awash with liquidity with overnight and one-week rates averaging within 6.75%-10.00% range. The Bank of Uganda continued its liquidity management operations, to absorb excess funds from the markets through the sale of Bank of Uganda bills and conducting a 7-day mop-up repo.
The Bank of Uganda conducted its second Treasury bond auction of the fiscal year, reopening the benchmark 3-year, 10-year, and 20-year Treasury bonds with a total offer size of UGX 990 billion.
Investor demand remained strong, supported by ample liquidity in the money market and reinvestment flows from recently paid bond coupons and maturing government securities. The benchmark bonds cleared at yields of 12.40% (3-year), 15.45% (10-year), and 15.95% (20-year).
In total, the auction recorded face-value allocations of UGX 1.035 trillion, representing an acceptance rate of 104.5% of the amount offered. The Bank of Uganda is scheduled to return to the primary market on 29th July for a Treasury Bond auction where the benchmark 2-year, 5-year, 15-year and 25-year will be re-opened.
The USD/KES pair was stable during the week trading within 129.00 – 129.50 range in a session dominated by balanced liquidity. Looking ahead, the Kenya shilling is expected to trade within the 129.20–129.90 range as month end flows come into play.
Brent crude advanced toward $85 per barrel last week and was set to post a weekly gain of roughly 12%, as heightened tensions between the United States and Iran fueled fears of potential supply disruptions in the Middle East.
Market sentiment was rattled after the U.S. carried out a series of strikes against Iranian targets this week, including reports of an attack on an oil tanker near Iran’s key export hub, marking the first such incident since renewed restrictions on Iranian ports were imposed. Adding to concerns, President Donald Trump indicated that U.S. action could extend to Iran’s critical infrastructure in the coming week if diplomatic negotiations fail to yield progress.
The dollar index steadied near 100.7 during the week but was still headed for a weekly loss, as weaker-than-expected U.S. inflation data led investors to temper expectations for additional Federal Reserve rate hikes in the near term.
At the same time, escalating tensions between the U.S. and Iran kept inflation risks in focus, driven by concerns over potential disruptions to energy markets. Earlier in the week, the U.S. carried out a series of strikes against Iran, prompting retaliatory action from Tehran against U.S. military installations in the region.
Meanwhile, economic data showed that consumer inflation rose by less than anticipated in June, while producer prices unexpectedly declined, reinforcing the view that underlying price pressures may be easing.
The British pound remained above $1.35, close to its highest level since mid-May, following a strong rally on Wednesday driven by reports that Andy Burnham is expected to appoint Shabana Mahmood as chancellor. Market sentiment was also supported by new data showing the UK economy returned to growth in May, with GDP expanding by 0.1% after shrinking by 0.1% in April.
The euro climbed above $1.145, trading near its highest level since June 19, as softer-than-expected U.S. inflation data pressured the dollar and boosted expectations of further policy tightening by the European Central Bank. The ECB, which delivered its first-interest rate hike in three years in June, is widely expected to raise rates again at its upcoming meeting.
Gold was seen trading below the $4,000-per-ounce mark on Friday and was poised for a weekly decline of more than 3%, as escalating Middle East tensions drove oil prices higher, intensifying inflation concerns and reinforcing expectations of elevated interest rates.
