Kenya FX & Policy Monitor What’s Moving the Markets?

Todays Highlights 

• CBK to partially buy back KES 76.5 billion bond to ease domestic maturities

• Forex reserves hit record KES 1.6 trillion on surplus Eurobond cash

• Banks, firms pocket KES 30 billion from road annuity scheme 

• Kenya setting up oil-backed sovereign wealth fund 

• CBK Cuts Policy Rate by 0.25% 

USD KES Overview

The Central Bank of Kenya (CBK) announced plans to partially buy back a KES 76.5 billion domestic bond, a move clearly aimed at easing near-term redemption pressures and smoothing the domestic maturity profile. For local markets, this operation injects breathing room for the Treasury while temporarily improving liquidity in the interbank and secondary bond market. However, the buyback’s partial nature means duration risk remains, particularly for investors holding mid-to-long tenors. We expect a mild steepening of the yield curve as short-term paper attracts demand.

From a currency perspective, this policy leans mildly supportive of the KES, as it reduces rollover anxiety and signals fiscal discipline. However, sustained impact will depend on how the buyback is financed, if through short-term issuance, the relief may prove temporary. Kenya’s forex reserves surged to a record Sh1.6 trillion, driven by Eurobond inflows and delayed spending of external funds. On paper, this offers the CBK ample room to defend the shilling and anchor FX stability. 

However, the rally in reserves must be interpreted cautiously. Much of the build-up is temporary in nature, reflecting Eurobond surplus positioning rather than a structural current account improvement. As these funds are gradually deployed for debt service and project disbursements, we expect reserves to normalize toward Q1 2026 levels. 

Banks and construction firms have reportedly pocketed KES 30 billion from the ongoing road annuity scheme, injecting fresh liquidity into the corporate sector. This fiscal activity, while positive for infrastructure growth, introduces a short-term liquidity surge in the interbank market, which could momentarily soften the KES if those proceeds translate into higher import demand or USD conversions. However, for equity and credit markets, this is a clear positive, supporting near-term earnings momentum and sectoral liquidity. 

The government’s plan to establish an oil-backed sovereign wealth fund marks a key milestone in institutionalizing fiscal buffers and stabilizing future commodity-linked revenues. This could strengthen investor confidence in Kenya’s fiscal framework and attract FDI inflows, both supportive of the KES. However, clarity on governance, transparency, and operational timelines will be essential to sustain credibility. 

At its most recent Monetary Policy Committee (MPC) meeting, the CBK reduced its benchmark lending rate by 25 basis points, continuing its rate cutting cycle. In the short term, the rate cut provides a tailwind for local borrowers and eases funding costs for banks and corporates. However, from a currency standpoint, lower rates tend to reduce the carry appeal of KES, especially in a global environment where U.S. yields remain somewhat elevated. 

That said, the CBK’s record Sh1.6 trillion in forex reserves and ongoing bond buyback program provide buffers that should limit near-term KES volatility. The shilling may experience modest depreciation pressure as the rate differential narrows, but active CBK liquidity management will likely contain excessive weakening. 

Our base case sees USD/KES stabilizing around 128–131 over the next quarter, with the CBK using its reserve cushion to smooth adjustments rather than defend specific levels.

USDX  Overview

The U.S. Dollar Index traded in a narrow band around 98.5–99.0 for most of October, reflecting a consolidating market after months of volatility. Inflation data came in slightly below expectations at around 3.1% year-over-year, reinforcing expectations of upcoming Federal Reserve rate cuts and reducing the dollar’s carry appeal. Global trade and safe-haven flows remained muted, limiting the dollar’s upside despite ongoing geopolitical and fiscal uncertainty. Overall momentum and positioning appear weak, with the index’s upside likely capped near 99.0 unless a structural catalyst, such as a hawkish Fed shift or renewed global risk aversion-emerges. With softening inflation and the markets pricing in further rate cuts, the USDX is expected to remain range-bound or drift slightly lower toward 97.0 in the near term.

Conclusion

Overall, Kenya’s near-term financial stability is supported by strong forex reserves, proactive liquidity measures, and efforts to strengthen fiscal frameworks. While modest pressures on the shilling may persist due to narrowing rate differentials and temporary reserve inflows, active policy management should help contain volatility. Continued clarity on financing strategies and structural reforms will be critical for sustaining investor confidence as markets adjust in the months ahead.