Kenya’s downward spiraling currency (USD/KES and EUR/KES are up 12% and 18% respectively since last November) coincides with soaring inflation (CPI inflation increased to 14.5% in June from 13% y/y in May) on the back of a hitherto rise in international fuel and food prices, the latter of which has been especially potent given poor domestic rainfall.  That recently enacted, targeted subsidies failed to mollify the trend, while core inflation (7.9 versus 7.3 in May) ticked up as well–suggesting some entrenchment of expectations–should only stoke pessimism; indeed analysts with Absa Capital target further year-end rise to at-or-above 15% and a current-account (CA) deficit gap of nearly 9% of GDP from 7.4% end-last year.  Indeed the recent hawkish flailing from the MPC ahead of its July meeting (a 175bp hike to 8% after only 50bp in cumulative hikes YTD) is hardly reassuring, much like its dogmatically stubborn maintenance of a 4 month FX/import cover ratio, a tactic which has had the not-so-curious effect of requiring perpetual replenishment given the bulk of  import inflation is priced in dollars, while providing a telltale telegraph to speculators (whom the central bank now has in its crosshair; note the now-banned use of funds borrowed from the overnight window for interbank market or foreign exchange trading in an effort to curb volatility) that now-deeply negative real short-term rates are indeed for real while GDP growth (5.6% in 2010) will likely fall under 5% in 2011 (one reason why the 20-share index, down ~20.4% trails only Uganda YTD across SSA equities).  Overseas remittances, meanwhile, are up a third from last year, meaning that if the state continues to suffer in its bid to borrow it may wish to try a more targeted approach.  Yields won’t be topping for awhile.

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