CAIRO: The Egyptian pound reached a five-year low against the US dollar this week, trading as low as 5.7740 — but experts say the trend should reverse as the year comes to a close.
“Concerns about the future of the Egyptian pound against its main foreign reserves currency, the US dollar, have been on the rise recently, especially since the local currency hit a low … not seen since July 10, 2006,” Cairo-based investment bank CI Capital said in a note.
Some analyst have said that the central bank might be condoning the drop, according to Reuters. Magda Kandil, executive director and director of research of the Egyptian Center for Economic Studies, told Daily News Egypt that the drop was not the result of any overt move by the central bank, but is in theory only subject to market forces.
However, as the exchange rate is an “important dimension for balance” within the national economy, Kandil explained, “the CBE is erring on the side of caution.”
The current monetary policy set by the CBE has remained unaltered since Sept. 2009, she said. Meanwhile, financial in-flows have been decreasing as financial outflows continue building momentum.
Mona Mansour, director of research at CI Capital, agreed, noting that as a long-term trend, foreigners are buying into the EGX, as well as bonds in the local Egyptian market. Due to these economic factors, Egyptian exports have become more competitive, and the tourism sector, as well, has seen a boost in figures, both of which have been driving local economic growth, an objective of the CBE.
While the depreciation is cause for concern in many sectors, the CBE will be content with the current situation so long as inflation “does not become a nightmare,” Kandil said. Nonetheless, were internal as well as export demand to “overheat,” the situation would be reason for genuine concern, she stated.
Analysts at CI Capital touched on the concern over excess inflation as well, but stated that although 70 percent of Egypt’s GDP stems from private consumption — along with being a net importer — foreign investors have maintained confidence in the Egyptian market as demonstrated through strong FDI in the second quarter of 2010.
What is more, confidence in Egypt’s long-term potential is witnessed through their “increased share in T-Bills and higher net buying volumes” in the EGX, the firm said.
Further optimism is founded on the fact that the US Federal Reserve is expected to open the pipeline to introduce additional currency into its domestic market, which should drive investors toward markets with high interest rates, such as Egypt.
Mansour indicated that this trend is “short-term,” and that the currency would “likely appreciate by December or early 2011.”
Her firm projected that “the EGP-USD exchange to average LE 5.73 in the forth quarter 2010 versus LE 5.694 a quarter earlier.”
Kandil noted that investors’ funneling of funds into the Egyptian market has “helped stabilize economic conditions in the country.”
Thus, analysts from CI Capital believe that such market dynamics will “uphold” the value of the EGP against the US dollar.
In the short-term, Reuters reported that Egypt’s pound is expected to face more selling pressure next week as foreign investors dump the currency ahead of upcoming elections; however, the central bank may intervene to stop any sharp declines from fuelling inflation.
Reuters cited JP Morgan’s research note, in which the firm said: “We believe the central bank will likely accelerate its intervention in the foreign exchange market again, especially if [the Egyptian pound] weakens to 5.79 [against the dollar].”
Some traders said the central bank might be buying dollars and letting the pound weaken to make Egypt’s exports more attractive. They also said the bank might be building reserves to cope with any market volatility before parliamentary elections on Nov. 28 and presidential elections in 2011.