Egypt's central bank said on Tuesday it intervened in the market to prop up the Egyptian pound, helping the local currency to rise against the dollar for the first time since political unrest gripped the country.
The currency had tumbled steadily since the eruption of political protests on Jan 25, and earlier in Tuesday's session it had reached a fresh six-year low.
The country's forex trading rooms were closed all of last week and only reopened on Sunday.
The pound strengthened on Tuesday by 1.4 percent to 5.876 to the dollar, from 5.960 earlier in the session.
Traders said the central bank seemed to be trying both to deter speculators and to restore confidence before the stock market reopens next week. The fate of the pound could play a big role in determining the extent shares are hurt by the crisis.
We intervened in the market, the bank's Deputy Governor Hisham Ramez said by telephone, declining to specify the amount.
One trader said the central bank had sold pounds to Egyptian banks, pushing up the value of the currency, then repurchased them moments later at the higher rate, a move that caught out banks who were long dollars.
This allowed the central bank to intervene without dipping into foreign reserves.
The trader estimated the size of the intervention at not less than $1 billion and not more than $1.6 billion.
This will make people think twice before taking positions on the dollar, the trader said.
The central bank said it last intervened directly in early 2009 in the wake of the global economic crisis. Bankers say it has often intervened indirectly via state banks since then, but it does not comment when asked about this activity.
It is a brutal intervention, said a trader at a bank in Cairo. We have seen the worst of the capital flight. They now want room to breathe before the stock exchange opens next week.
ACTION SOONER THAN EXPECTED
One economist said he had not expected the central bank to intervene before the pound had fallen to 6 to the dollar.
They are doing it earlier than the market had expected, which shows that they are taking seriously the issue of pound depreciation and they will intervene at any cost, said John Sfakianakis, an economist with Banque Saudi Fransi.
Forex traders said Egypt's state banks had been selling foreign currency in the previous two days to support the pound, which last closed at 5.816 to the dollar before the anti-government protests began.
Foreign investors spooked by the protests that paralysed much of the economy have been pulling funds out of the country, and there were no foreign bids at an auction of 15 billion pounds of domestic treasury bills on Monday.
Foreigners had been keen buyers of T-bills, attracted by Egypt's reputation for political stability and encouraged by strong growth that was running at about 6 percent a year before unrest hit key revenue earners such as the tourism industry.
Offshore holdings of T-bills were historically high before the crisis, somewhere in the order of 20 percent -- the historical average is 8 percent, said Antoon de Klerk, emerging debt analyst at Investec Asset Management in Cape Town.
We think it will slowly move back towards the average.
One currency trader estimated volume on the interbank currency market at $1.6-1.7 billion on Sunday and $1 billion on Monday. Traders put volume in normal times at $300-400 million.
Given that international markets are selling off Egypt and anticipated capital outflow is still very much on the table, there is little reason to expect the pound levelling off, Sfakianakis said at Banque Saudi Fransi.
Egypt's central bank had about $36 billion in foreign reserves and its banks were exceptionally liquid before the crisis, giving the country a war chest to help it to weather the crisis.
This local market itself is very liquid and can cover the needs of the Ministry of Finance, Ramez said. I think the market will normalise soon.
Bankers are bracing for a sell-off on Sunday of shares, which are a far more risky asset class than treasury bills because they are not guaranteed by the government, a trader said.
So far we have seen the impact of the T-bills, but we have not seen the stocks impact, he said.
Egypt's central bank accepted fewer bids than treasury bills it offered on Monday in an oversubscribed auction that received no foreign bids, suggesting demand has been knocked lower by the persisting political unrest.
The small number of Egyptian companies listed in London via global depositary receipts (GDRs) sold off sharply in the first few days of the protests but have since recouped some of their losses.
Emerging market analysts also think the pound could weaken further.
Despite the banking system possessing reasonable FX reserve ammunition, the Egyptian pound may be vulnerable on a variety of dimensions if protests last for 1-3 months, said UBS analysts in a note.
We would not be surprised to see the Egyptian pound depreciate by 20-25 percent over the next month. Whether or not the currency stabilises then depends on how populist the policies of any new regime are.