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Sunday, 27 October 2019

Egypt’s pound rallies to new two-and-a-half year high, approaching EGP 16 / USD 1 barrier

EGP rallies to new two-and-a-half year high: The EGP rose to a new two-and-a-half year high against the greenback, hitting EGP 16.10 from EGP 16.12 on Wednesday, central bank data shows. The EGP has risen 9.9% against the USD since the beginning of the year, including a 2.4% gain in October, Reuters reports. This is the strongest the currency has been since 4 March, 2017.

USD inflows into government debt instruments are still driving the rally, analysts tell Reuters. Naeem Brokerage’s Allen Sandeep also points to the recovering tourism industry, higher expat remittances, and a narrower trade deficit as key sources of USD inflows. Tourism revenues have jumped 50% y-o-y this year to USD 11.4 bn, while foreign holdings of Egyptian treasuries climbed to USD 18.3 bn in August.

A strong EGP will help keep inflationary pressures contained, and could kickstart consumption, says EFG Hermes economist Mohamed Abu Basha. Inflation hit its lowest levels in seven years in September. Abu Basha doesn’t see the rally doing much for Egypt’s exports, but points out that exports are “a relatively much smaller part of the economy.”

The CBE could allow EGP to weaken slightly to counteract tight financial conditions, says Standard Chartered: The EGP rally may not necessarily be long-lived though, as the Central Bank of Egypt could decide to allow the currency to weaken slightly to turn around tight financial conditions, Standard Chartered’s senior economist for MENAP Bilal Khan tells Bloomberg TV (watch, runtime: 3:11). CI Capital and Sigma Capital had both released research notes last week predicting that the CBE will begin enacting a liquidity push in the Egyptian market in tandem with reduced interest rates, eventually kicking off the economic growth cycle as credit and private sector borrowing for investment begin to rise.

Expect 300 bps in rate cuts by the end of FY2019-2020: Egypt’s inflation outlook is giving the CBE’s Monetary Policy Committee the scope to cut interest rates by “at least” 100 bps when it meets in November or December, followed by another 200 bps during the course of 1H2020, Khan says.

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