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U.S. Dollar Versus Egyptian Pound: A Review In Need of Update

Publish Date16/01/2013 01:58:46 PM

Last Update17/01/2013 09:31:36 AM

U.S. Dollar Versus Egyptian Pound: A Review In Need of Update

 

After the drop in the value of the Egyptian pound versus the U.S. dollar, seen recently in the wake of the political turmoil and drop in foreign reserves encountering the Egyptian economy, it is time to give an update about the outlook for the pound amid questions where the pound`s next station is!

 

Political Factors

By looking at the current political situation, it seems that there is relative calmness after the approval of the constitution which was passed by a 64 percent `Yes` vote in the referendum. Yet, there are some fears that celebrations of the 2011 revolution day on January 25 may witness some violence from opposition which accused the constitution of being an Islamic-backed one that failed to gain consensus from different political mainstreams and yielded in a split among Egyptians.

On the other hand, some officials referred that Parliamentary elections will take place in April, where the exact date will be announced by President Mohamed Mursi in February; hence, the government is likely to avoid trouble till the elections, especially as Islamic political parties will be looking forward to gaining the majority of seats in the coming People`s Assembly.

Across Egypt`s history, it is clearly known that the Egyptian pound had been a victim of political upheavals which caused the pound to depreciate gradually since touching a low of 5.80 on November 17, 2011 till recording a new low of 6.11 in December, where it was never seen closing below a rate of 6.0 since December 8, 2011, before it finally hit its all-time low this week when it touched 6.53 (buy price) and 6.58 (sell price), according to prices announced on the Central Bank of Egypt`s website on Jan. 16.

Foreign Reserves

Economic analysts may claim that economic factors are so far more important than the political instability as they largely determine the real value of the pound. When the pound faced aforesaid recent devaluation, fingers pointed to the decline in foreign reserves as the basic factor that caused the bank to undertake a managed devaluation to lower pressure on reserves that Central Bank of Egypt (CBE) said it represents a "critical minimum" that covers only three months of imports.

Egypt`s foreign reserves dropped sharply from $36 billion before the 2011 revolution to stand at $15.014 billion in January on the back of the retreat in foreign investments and tourism windfalls.

Foreign Aids and Loans

In response, the CBE already received $2 billion from oil-rich Qatar which pledged to double its loan to the CBE to $4 billion in the form of banks deposits and grants from $500 million to $1 billion, raising the whole aid to $5 billion. In addition, Qatar has already agreed to invest $18 billion in Egypt over the next five years.

Egypt will also get $500 million from Turkey by the end of the current month in addition to the rest of a $2.7 billion aid package from Saudi Arabia and already provided Egypt $1.5 billion of the package.    

In the same vein, the EU had offered Egypt 5 billion euros in grants, loans and concession loans over two years to endorse Egypt`s democratic transition, stressing that this would move in line with the IMF installments.  

IMF Loan

The Egyptian government, from another side, resumed talks with the IMF on $4.8 billion loan that was halted in November on political unrest, where the IMF is expected to send a technical team back to Cairo within two to three weeks to discuss the loan.

Egyptian Prime Minister Hisham Qandil said at a conference on Jan. 13 “We are going to be back on track very soon.”   

Hisham Ramez, who will be in charge of leading the CBE next month, said the pound may weaken further to 6.7 by the end of March, before stabilizing as Egypt receives the IMF loan and other foreign aids; while former Finance Minister Momtaz El-Saieed said on Jan. 2 the pound will never depreciate to 7 levels.

In the meantime, the cheap loan, with only 1.1% interest, is considered very crucial to cutting Egypt`s budget deficit and balance of payment gaps, yet the government will probably renegotiate the terms of the accord in order to avoid rage by citizens as the conditions include sharp austerity measures, encompassing removing subsidies on energy products, which shaves off 25 percent of total government spending.

It seems that letting the pound devaluate more is one of the conditions for the IMF loan that were not announced, reminding that the IMF was also blamed for putting pressure on Ebid`s government in 2003 to allow the Egyptian pound to move freely against major currencies as a condition for providing loans to the government.

CBE Policy

The CBE may be lowering pressure on reserves through raising the ceiling of the managed float to near 6.50-6.70 range instead of the below 6 levels adopted previously.

What increased the pound`s depreciation is the rush of many investors and citizens to convert their deposits into foreign currencies on expected devaluation in the pound; the low amounts of dollars owned by banks and foreign exchange offices paved the way for seeking the green currency in the black market.

The CBE announced a new mechanism of FX auctions to banks, which aims to provide banks with their needs of foreign currency with a maximum of $11 million for each bank, starting from Dec. 30, 2012, to “preserve foreign-currency reserves and ration their use.”

However, the Egyptian pound continued its drop despite these auctions, referring that it also fell after Tuesday`s auction, to hit a new low of 6.58 pounds to the dollar, after the government said it sold $74 million from $75 million offered.  

The pound dropped about 6 percent since the central bank began its dollar auctions, referring that it plummeted for the eighth day this month following Tuesday`s auction.  

Meanwhile, there are some fears the CBE could be shifting to a full free-floating exchange rate regime against the U.S. dollar as it may push the pound lower due to the instability surrounding the Egyptian economy`s fiscal situation.

It seems that the CBE will not leave the pound fluctuate and drop further against greenback as this could lead to a shaky business environment; hence prevent investors from investing in Egypt in the coming period and provoke more capital flight.  

Technically speaking , the pair succeeded in reaching our previous detected technical objective at the psychological level of 6.50 as seen on the provided daily graph. Actually, we believe that it is on the way to flirt with the Fibonacci projection level of 261.8% at 6.6700 before showing aggressive bearish actions since RSI 14 has reached extreme value at 87.00 before showing negative tendencies during the previous four days and is currently valued at 82.00.

Click on the image for a larger view

The level that could be described as a clue for the present price actions resides at 6.50 and a break of which will affirm the negative overview over short term basis. Of note, breaching the aforementioned psychological level will assist Vortex -trend indicator- to show some kind of relief.

The first technical target for this simple technical reading resides at 6.23 boundaries followed by 6.07; whilst the main technical target resides at 5.90.

On the upside, breaching through the psychological level of 7.00 will give us a rational reason for concern.

What about Other Major Currencies?

It is clear from the rates of other currencies that they were also affected by the dollar`s climb versus the Egyptian pound. In the managed-float exchange rate adopted by the CBE, the bank occasionally intervenes to keep the rate of the dollar within certain range through buying and selling while leaves other currencies to move freely against the U.S. dollar.

Then, simply the price of the euro for instance is calculated by multiplying the EUR/USD rate by the USD/EGP rate; thus, the rise in the devaluation of the pound against the dollar had caused a rise to other major currencies against the pound.

Therefore, the movements of other currencies are likely to be affected by the dollar which is expected to rise to 6.7 levels as the rise in the dollar versus the pound will offset any drop in other currencies against the U.S. dollar worldwide.

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