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USD CBE auction (Sunday, 30 Oct): 8.78 (unchanged since 16 March 2016)
USD parallel market (Sunday, 30 Oct): EGP 17.50-18.00, depending on who you believe (from 17.00 on Saturday morning, 29 Oct, Al Mal)

EGX30 (Sunday): 8,357.42 (+0.17%)
Turnover: EGP 654.9 mn (50% above the 90-day average)
EGX 30 year-to-date: +19.28%

THE MARKET ON SUNDAY: Selling pressure trimmed early gains yesterday, leading the EGX30 to close up just 0.2% in moderately heavy trading. Top gainers included Ezz Steel (+2.7%) and Orascom Construction (+2.2%), while Amer Group (down 4.2%) and Eastern (off 2.9%) led decliners. With market turnover of EGP 654.9 million, and local investors were the sole net buyers of the day.

Foreigners: Net short | EGP -39.8 mn
Regional: Net short | EGP -0.3 mn
Domestic: Net long | EGP +40.1 mn

Retail: 40.0% of total trades | 41.4% of buyers | 38.5% of sellers
Institutions: 60.0% of total trades | 58.6% of buyers | 61.5% of sellers

Foreign: 5.7% of total | 2.8% of buyers | 8.8% of sellers
Regional: 3.7% of total | 3.6% of buyers | 3.7% of sellers
Domestic: 90.6% of total | 93.6% of buyers | 87.5% of sellers

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PHAROS VIEW

A managed float looks more politically appropriate

Previously announced dates by government officials indicate devaluation should be penciled in for November, while the Eurobond issuance is set for mid-November, coinciding with the MPC meeting on interest rates on November 17, which we estimate would be the time for a significant rate hike (c.200 bps) to raise the attractiveness of the EGP as an investment vehicle and attract fixed income portfolio inflows from international investors. These dates indicate a devaluation in November is very probable.

Monitoring the 3M non-deliverable forwards (NDFs) provides a less-speculative picture of the real market value of the EGP-USD exchange rate. Previous rounds of the EGP devaluation showed the 3M NDF exchange rate can be used as a strong indicator for the magnitude of the CBE’s next official rate adjustment. The 3M NDF rate averaged EGP 8.80 per USD in February 2016, just before the exchange rate hit EGP 8.88 versus the USD in March 2016. The 3M NDFs rate averaged EGP 11.00 per USD in September 2016 and EGP 12.05 per USD as of October 24, with the one-month moving average recording EGP 11.80 per USD. The readings suggest that the next FX rate move could be somewhere between EGP 11.00 – 12.00 versus USD.

In that context, we note that parallel market rates are quite useful in defining the EGP-USD trend, rather than the exchange rate value, due to unrealistic speculation and the high risk premium. We believe that FCY injection will walk hand-in-hand with more flexible movements in the exchange rate to ensure NIR preservation. The larger the EGP devaluation, the less CBE’s FCY injections.

Tap here for the full note.

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