Egypt’s third major currency devaluation in less than a year appeared closer to achieving its aim, with signs that the foreign-exchange market may be stabilising despite a whipsawing pound.
The North African nation has allowed its currency to weaken in phases and the latest devaluation, which started last week, is finally helping to narrow the gap with prices quoted in the black market.
After suffering the biggest one-day drop since late October on Wednesday, the pound swung between gains of over 1% and a loss of 3%. Many traders in the black market paused operations after the plunge this week.
The pound is still the world’s worst performer this year, and measures of short-term historical volatility show the swings are the most extreme globally. On Wednesday, it pared losses from a record after state banks sold dollars, according to Citigroup Inc.
Foreign exchange was scarce for months in Egypt as the economy of the Middle East’s most populous country contended with the rising cost of commodities from food to fuel, triggered by Russia’s invasion of Ukraine. The pound has lost about 33% of its value since late October, when Egypt said it would embrace a flexible exchange rate, a move that helped it clinch a $3bn loan from the International Monetary Fund.
“The end of the devaluation process is close,” Citigroup strategists including Luis Costa and Lydia Rangapanaiken said in a report. “Although we do not expect the authorities to shift to a free-floating regime, further flexibility is expected, in line with the fund’s requirements.”
Trading volumes on Wednesday surged to about $831mn, according to Citigroup, an indication that the clearing of a backlog of pent-up demand for dollars is underway.
In a sign that foreign capital is trickling back into the country, investors from other Arab countries made net purchases of around 7bn pounds ($236mn) in Egyptian Treasury bonds in the secondary market on Wednesday, according to the local stock exchange’s website.
In an auction of six-month Treasury bills held on Thursday, the country sold 51.9bn pounds of the securities at a yield of 21%, with investors offering to buy more than three times that amount.
Last year, the reluctance to allow for a steeper currency adjustment was a turnoff for international buyers, whose retreat from the local debt market helped push up the yields on Egypt’s Treasury bills by the most since 2016.
Dollar inflows into the interbank market reached as much as $750mn on Wednesday from an average of $150mn previously, state MENA news agency cited a banker as saying.
The pound was 0.6% stronger against the dollar on Thursday, trading around 29.61 at the close in Cairo. It slumped as much as 14% to a record low of 32.1 on Wednesday.
The parallel rate declined to 29-30 on Wednesday from 31-33, according to Citigroup’s strategists. Wednesday’s moves “reflect steps in the right direction,” they said.