The Egyptian pound fell on Sunday when trade resumed after a week-long suspension due to political unrest, but the drop was less sharp than many traders had feared as the central bank appeared to support the currency.
The pound closed at 5.9300 against the dollar, its lowest finish since January 2005, compared with 5.8550 when banks last traded the currency on January 27.
Trade was heavy as some foreign investors and Egyptians sent money out of the country because of the political instability. Trading volume totalled about $1 billion, double or triple the normal amount on a Sunday, one dealer estimated.
The head of treasury at a Cairo-based bank said there was heavy dollar-buying, but dollars were being provided by two local commercial banks which the central bank has traditionally used to help manage the price of the pound.
We have not had the central bank intervening directly, he said.
Deputy central bank governor Hisham Ramez indicated last week that the central bank, which had $36 billion of official foreign reserves at end-December, did not want to see a sharp fall of the pound.
We don't comment on currency matters, but this will not happen, he told Reuters.
PRESSURE MAY GROW
Currency traders said pressure on the pound could grow more acute on Monday when banks outside the Middle East opened after the weekend.
People are trying to get out. There will be more tomorrow, when I think we're going to test 6.00, a London-based trader said.
Hisham Ezz al-Arab, chairman of Commercial International Bank, Egypt's biggest private bank, said the central bank was focused more on providing liquidity to the market than on maintaining the value of the pound.
The main objective of the central bank or the market makers is to make sure there is liquidity, he told al Arabiya television. The price is not the objective.
UBS Investment Research predicted on Friday that the pound could fall by as much as 25 percent within a month, which would put it well below 7.00 against the dollar. Credit Agricole suggested on Thursday that the pound could drop 20 percent over the short term.
The non-deliverable forwards market has been showing increasing expectations for long-term depreciation of the pound; one-year forwards were at 6.63 late last week, compared to levels around 6.25 in mid-January.
Some traders think the pound may stabilise after a few days, however. A Dubai-based trader said he was expecting about $7 billion to $9 billion to flow out of Egypt over time as a result of the political unrest, which the central bank could handle fairly comfortably given the size of its reserves.
The risk to the pound is a much greater-than-expected outflow of money, which could occur if the political crisis drags on, he said.
A fresh test of market confidence in Egypt will come on Monday when the central bank is due to auction 15 billion Egyptian pounds of short-term Treasury bills, after being forced to cancel auctions last week.
Some Egyptian banks are expected to buy the bills to back the government's efforts to stabilise the financial system, but it is unclear whether foreign banks will buy. Any substantial foreign interest in the bills could help to support the pound.
Dealers said secondary market trade in government debt was very light on Sunday because of the political uncertainty, with offers of bills by foreign investors finding few buyers.
We have no idea where the rates are going to be on Monday, a fixed income dealer at a Cairo bank said. Most banks were having problems calculating their reserves, which made it hard for them to judge how many T-bills they should buy, he added.
Banks had not yet settled many transfers and debt market trades made in the two frantic days before they were closed down by the political protests. They must see where they stand.