• USD-EGP reverses appreciation trend; back to above EGP17-mark The USD-EGP slid 8.6% yesterday to EGP17.405 (mid-price point of the Central Bank of Egypt’s official rate), reversing more than a week of sustained appreciation against the greenback. The move was likely triggered by the CBE allowing banks to finance imports of ‘non-essential’ goods, according to Reuters, with banks having channelled their supply of USD in the first two weeks after the float to essential goods. The story also added that the CBE has required banks to inject an equivalent amount of letters of credit opened for non-essential goods in the interbank market, thereby increasing demand for the greenback. This represents a mirror image of the trend in the first week after the float, when banks were pushing for a stronger EGP as they competed for increased inflows of EGP.
• Healthy two-way volatility We see yesterday’s weakening of the USD-EGP as healthy volatility, creating a two-way movement for the EGP in a more liberalised market setting. This comes in line with our expectations of a period of volatility before the market eventually settles within the range of EGP14-15. The weaker EGP is likely to encourage further de-dollarisation, in our view, helping sustain inflows into the banking sector. Total inflows of USD2.6bn into the banking system in the two weeks post the float is clearly a positive indicator, but there is likely more money outside of the system, which could have been discouraged by the rapid strengthening of the USD-EGP. A weaker USD-EGP may also encourage another wave of inflows into the carry trade with most investors deeming current USD-EGP rates as undervalued. Deputy Finance Minister Ahmed Kouchok said earlier “flows into the local debt market reached around USD1bn since the float.”
• Volatility also evident in yields of government debt Yields on local treasuries have given up a lot of their gains since the float with yields on the 9- and 12-months bills down by c280bps on average in the past week. We see room for some two-way volatility for yields in the coming few weeks as well, though a flat yield curve clearly suggests that the market expects only monetary easing from this point, a view that we share. We reiterate our view that CBE is likely to cut policy rates by 100bps in 2H17 as the inflationary shock fades away.

Mohamed Abu Basha