EGP could lose up to 10% of its value against the USD by 2020
**#1 Is the central bank propping-up the EGP amid the ongoing emerging markets selloff? Capital Economics suggests in a report out yesterday that the central bank has “intervened to support the EGP in recent months.” The report points as evidence to the stability of the EGP throughout the emerging markets sell-off when compared to other currencies. The assessment comes despite past pledges by Governor Tarek Amer that the CBE is out of the business of managing the currency.
How much longer can it continue? While Egypt’s rising FX reserves and improving external position may allow the CBE more time to prop up the currency, the sting of the sell-off in EM assets may force it to abandon the policy. Egyptian assets have been strained as “foreign investors have been net sellers of Egyptian stocks over the past few months and also reduced their holdings of Egyptian government bonds, which has contributed to a fresh rise in bond yields.” Furthermore, the IMF is also likely to push the government to stop intervening in the currency market to keep it attractive to foreign investors, the report says.
But let’s keep this all in perspective: Capital Economics sees the EGP losing up to 10% of its value against the USD by 2020. The pound is seen as easing to 19-20 per greenback by then.
Once again, this is why we don’t see the central bank cutting interest rates soon. The CBE’s monetary policy committee meets at month’s end to decide on interest rates. We’ve previously championed rate cuts to kickstart private-sector borrowing, but now believe the MPC will leave rates on hold to ensure Egypt remains attractive to the carry trade in an environment in which other markets are taking. FX stability is on the keys to anyone looking at a carry trade, so…