Where is the Egyptian Pound Headed as the Dollar Continues to Rise in the Black Market?

Again the black market of currency in Egypt is back in activity, and the dollar has taken a breather in recent transactions, starting to rise again, to register, according to traders, a level between 33 and 33.5 pounds.

The highest dollar exchange rate recorded in the parallel market was around £38 in the last week of last year. However, the Central Bank of Egypt’s movements in the inventory of stored goods contributed to the collapse in demand for black market dollars by importers, which dropped it to the £30 level during last February’s transactions .

The price of the dollar rises again in Egypt, in awaiting the implementation of the offer programme

Egypt has devalued the pound three times in the past year, causing the local currency to lose nearly half its value against the dollar. It also decided a fourth decline in early January, so that the dollar jumped from the level of 15.74 pounds in March last year, to about 30.84 pounds now.

However, in recent trading, the pound fell more than 6% against the dollar in the parallel market, due to growing expectations of a further devaluation of the local currency.

The pound was trading off-bank at 33.50 against the dollar, up from 31.50 in last week’s trading, Bloomberg reported, quoting traders, up more than 8% on at the official exchange, climbed in recent transactions at £30.84.

The price of the pound in futures contracts was also not in improved terms, as it fell in 12-month non-deliverable contracts to the level of 37.60 pounds to the dollar, a difference of 22% from the current official exchange rate. The contracts future on the pound for a month were down about 3.5% to 32.40 from the end of last month.

What do global banks expect?

In terms of expectations, they point to the possibility of further devaluation of the Egyptian pound as the country struggles to attract significant foreign investment from Gulf sovereign wealth funds and as foreign portfolio investors continue to watch the market from afar.

In its forecast, Societe Generale Bank suggested that Egypt would devalue the pound again in the near future. The bank indicated that the pound could finish the quarter in traded below its current levels by about 10%, as Egypt will need a cheaper currency given its large current account deficit and dollar shortage.

Although the pound has lost 50% in the past year after devaluing it three times, the currency has not yet achieved a balanced exchange rate in the near term, according to Societe Generale. The bank’s strategic analysts said, “Real interest rates remain negative based on the decisions that have been made or those that are expected to be implemented.”

The report predicted it would close out the quarter in priced at 34 against the US dollar. He stressed that as portfolio inflows return, the central bank will have to prioritize rebuilding its foreign exchange reserves, which will put further pressure on the pound.

While Credit Suisse believes the effective exchange rate underestimates its real value by around 30%, which equates to just £23.8 over the long term, in as the fair value measured by the real effective exchange rate indicates its increase during 12 months to about £24 per dollar, compared to its trading in the official market amounted to £30.6 during the last trading week, at the time of issue of the report.

He pointed out that certificates of deposit of Egyptian companies listed overseas indicate that the dollar is trading at £33.5, which means it is about 10% higher than the current level of 30.5. However, the bank stressed that the exchange rate could see further weakness in the near term, but that a recovery is possible in the next 12 months.

Although Bank of America did not specify an expected price for the dollar, believes that the decline in the pound is a practical solution to fill the external financing gap that Egypt has recently suffered, as it expected a significant decline without specifying the rate of decline.

At the same time, data from the Central Bank of Egypt showed that foreign assets stood at a negative £654.43 billion, up from a negative £494.3 billion at the end of last December. It decreased by around £160.2 billion, due to maturing debts and the settlement of arrears at ports by importers.

That means a drop of $1.7 billion, based on central bank exchange rates at the end of the month. On the other hand, the money supply increased by 31.6% year over year in January. The money supply totaled 7.73 trillion Egyptian pounds ($252.8 billion) in January, up from 5.87 trillion pounds in the same month last year.

In terms of the country’s foreign exchange reserves, recent data from the Central Bank of Egypt revealed that they rose to about $34.352 billion in February, an increase of about $128 million from last January.

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