All eyes are likely to be on Nigeria's central bank next week to see whether it is going to allow the mid-point of its naira trading band to weaken, while Kenya's shilling is likely to gain on the back of aggressive monetary tightening.
The naira is likely to depreciate next week because of uncertainty over a central bank review of its target band for the currency.
The central bank has been trying to keep the naira in a +/- 3 percent band around 150 to the dollar, but Governor Lamido Sanusi told Reuters on Monday the bank would review that framework in the next few days.
Depending on where the exchange rate settled, it may move the midpoint to 155/156 to the dollar, he said.
Traders said sentiment favoured further depreciation in view of the new thinking in the central bank.
"There is a lot of uncertainty in the market considering the new thinking by the central bank on reviewing the present target band upward," one trader said.
The currency was trading at 157.80 to the dollar on the interbank market on Thursday, level with Wednesday's close.
The market is currently stable as a result of large dollar sales by some energy companies on Wednesday, but could open next week weaker as the market is expecting the central bank's new direction on the naira," another dealer said.
Traders said the naira closed weaker at the bi-weekly auction on Wednesday as the regulator sold only $180 million at 150.73 to the dollar, short of the $262.96 million demanded, and $200 million at 150.25 to the dollar on Monday.
However, the central bank has continued to sell additional dollars directly to some lenders outside the regular bi-weekly auction as part of its measures to support the local currency.
Kenya's shilling is seen firming, helped by tight liquidity in the money market after a surprisingly aggressive central bank rate raise and an expected increase in offshore investors in fixed income securities.
The central bank stunned the market this week with record 550 basis point increase in its benchmark lending rate to 16.5 percent, hot on the heels of a 400 basis point rise early last month.
The shilling has rallied 1.7 percent on the rate decision, though its gains have been checked by oil importers taking advantage to buy greenbacks.
At 1250 GMT, commercial banks quoted the shilling at 97.05/97.25 against the dollar, stronger than last Thursday's close of 99.60/100.20.
"Sentiments are still for a stronger shilling after the central bank raised its rates. The support level right now is at 96.50. If it breaks that we may see the 95 level," said John Muli, a trader at Africa Banking Corporation.
The central bank has been hoovering up shillings through repurchase agreements and increasing the supply of dollars by selling directly to commercial banks.
"We expect the local unit to continue strengthening aided by the credit squeeze occasioned by rising interest rates," Bank of Africa said in a note.
"Further, the local unit will continue receiving support from intervention in the market by authorities coupled by interest from offshore clients in fixed income instruments."
Another round of monetary tightening this week is seen firming the Ugandan shilling , although an announcement by the central bank that it was doubling its daily dollar purchases may check those gains.
At 1200 GMT, commercial banks in Kampala quoted the local currency at 2,615/2,625 against the dollar, slightly stronger than last Thursday's close of 2,625/2,635.
The Bank of Uganda (BoU) has been tightening its monetary policy screws since July, when it introduced a benchmark Central Bank Rate . It has raised the rate every month since to tame a rampant inflation. [
The shilling fell as much as 0.9 percent against the dollar in the two days after Tuesday's rate announcement as banks bolstered their dollar positions, before recouping some of the losses.
My expectation is for a firm shilling because we're likely to see high offshore participation in next week's Treasury bond auction," said Standard Chartered trader Denis Mashanyu.
BoU is auctioning a two-year bond worth 95 billion Ugandan shillings ($36.5 mln)on Wednesday.
The central bank said it was increasing its daily dollar purchases to $1 million from $500,000 to build up its foreign reserves.
"We know the market now has sufficient dollar supplies so we decided to increase the amount of dollars we buy daily to build our reserves," spokesman Elliot Mwebya said.
Faisal Bukenya, head of market making at Barclays Bank Uganda, said there was strong dollar demand whenever the shilling strengthened below 2,600.
"Generally I would bet on a stronger shilling but we have also seen that whenever it drops below 2,600 we get overwhelming dollar demand which pushes it lower again," he said. "We'll trade between 2,560-2,625."
Tanzania's shilling is expected to gain next week due to increased dollar supply and central bank monetary tightening, traders said.
vCommercial banks in Dar es Salaam quoted the shilling at 1,755/1,765 against the dollar, stronger than last Thursday's close of 1,820/1,830.
"The outlook is for a stronger shilling ... the (central) Bank of Tanzania has increased the supply of dollars in the market this time and is communicating a lot with customers to meet their demands," said Hakim Sheikh, a trader at Commercial Bank of Africa, Tanzania.
"The central bank is directly selling dollars to oil importers via commercial banks to avoid some banks holding on to dollars for speculation. They supply the dollars and set the maximum margin at which banks can sell the forex to customers."
Traders said they expected the shilling to trade in the 1,750-1,760 range in the coming days.
"The central bank has intervened by selling dollars to oil importers. If the central bank continues to support the shilling, we expect it to gain next week," said Fred Siwali, a dealer at CRDB Bank.
Traders said the shilling was also benefitting from mining companies selling dollars to meet month-end salary and tax commitments.
The central bank said it had traded $58.76 million on the interbank foreign exchange market in the past week.
The kwacha is likely to soften against the dollar in the coming week due to continued uncertainty on the resolution of Europe's crisis and rising demand for hard currency.
The currency of Africa's top copper producer lost 2.3 percent against the dollar on Thursday to 4,960 from 4,850 a week ago.
"Market sentiment is in favour of a weaker kwacha. It will largely depend on what happens to the euro. There is still a lot of appetite for the dollar, which hasn't been met," one commercial bank trader said.
The kwacha traded between 4,600 and 4,850 for much of 2011 but retreated to as low as 5,150 in the immediate aftermath of a surprise September election victory by long-time opposition leader Michael Sata.
The cedi will remain under pressure on the back of increasing dollar demand from importers and offshore investors, traders said.
The cedi remained weaker than the psychologically key 1.6 level on Thursday after closing at 1.6000/25 on Wednesday, Barclays Bank Ghana Treasury head Kobla Nyaletey said.
"It will trade comfortably above 1.6000 next week," he said.
itters about Europe's debt crisis were also causing dollar strength that was weighing on the West African unit, Nyaletey added.
Traders said the central bank had been selling dollars but its presence was not robust enough.
Christopher Nettey of Stanbic Bank Ghana said the weakening trend could steady around 1.6030/65 next week.
"This should give enough reason for the central bank to come in more vigorously and promptly than it's doing now," Nettey said.
Some offshore investors were also dumping cedi debt in favour of markets they saw as having more attractive yields than Ghana, he added.
Source: Reuters (Reporting by Chiwoyu Sinyangwe, Oludare Mayowa, Claire MacDougall, Kevin Mwanza, Elias Biryabarema and Fumbuka Ng'wanakilala)