"Sentiment are still for a weaker shilling. Clients are hedging due to pre-election jitters," said Duncan Kinuthia, head of trading at Commercial Bank of Africa.
"They are trying to cover their requirements for March right now. They don't want to get caught if the shilling weakens further."
Technical charts showed shilling support at 88.00 against the dollar, but dealers say it could weaken to 89 before presidential, parliamentary and regional polls on March 4. The last elections in 2007 were followed by violence that saw 1,200 deaths and drove thousands from their homes.
There is concern that there could be violence again this time because the alliances forged by the main presidential contenders are shaped along ethnic lines, and the vote is expected to be close.
Traders said the shilling could get support from the central bank intervening to sell dollars and mop up the local currency supplies from the market, tightening liquidity.
The bank has pumped in undisclosed amount of dollars in seven separate occasions this year and regularly mopped up liquidity via repurchase agreements.
On the money market, the weighted average interbank lending rate edged up for the 12th straight session to 6.9 percent on Tuesday, from 6.7 percent on Monday, as banks competed for the available shillings.
But analysis of the shilling's seven-day and 14-day weighted moving averages suggest a weakening trend in the near term.
"The shilling is not just weakening on normal flows, that's why the central bank is intervening. But we could see some recovery if the elections go well," said a trader at one commercial bank.
Copyright Reuters, 2013
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