Uganda shilling: imbalances driving the unit weakness not about to abate soon

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The Uganda shilling continued to battle a range of headwinds surrendering gains post Bank of Uganda intervention.
Foreign portfolio disinvestment was the main driver of the currency weakness during the week. Trading was in the range of 3770/80.
A weak shilling has a number of implications for the country’s growth prospects. It reduces the purchasing power, makes imports expensive, fuels inflation, increases government’s cost of borrowing at the same time making debt servicing difficult.



In the regional markets, currencies were on similar decline with Kenya shilling trading at 117:20/40.

In fixed income, the outturn in the local bond market was reflective of the tightening financial conditions and a global sell off in risk assets.
In the last couple of weeks the local markets have been gradually adjusting to an outlook for higher global rates as most Central Banks policy momentum is all one way. Yields for the 5 year and 20 year bonds printed at 14.500% and 17.008% respectively.



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In the global markets, the US dollar remained way ahead of its major peers after the Federal Reserve mid-week 75 basis point rate hike, the biggest one time increase in nearly three decades.
The Fed’s aggressiveness is likely to have ripple effects throughout the global economy.



Going forward, the imbalances driving the shilling weakness are not likely to abate soon and this will keep the unit vulnerable to losses.

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