CAIRO: Egypt’s pound hit a five-year low on Tuesday as investors dumped Egyptian government securities in carry trade moves, with some unnerved as the pressure on the pound was not countered by the central bank.
Foreigners "are or were scared that the pound is in freefall," said a currency analyst based outside of Egypt.
"They don’t mind not getting the appreciation of the currency when the benefit of the carry is assured, but when they have to suffer the depreciation they cut and run," he added.
The pound slipped to 5.777 to the dollar, its lowest close since June 2005, from 5.7745 on Monday.
At an auction on Monday, the government offered LE 3 billion of 273-day bills but only sold 1.5 billion as the bids it received were much lower than at previous auctions.
Offshore investors had been buying short-term treasury bills over the last year to take advantage of high Egyptian pound interest rates and a relatively stable currency.
Foreign holdings in the domestic T-bill market rose to more $7 billion in July from just $530 million in December 2009.
The average yield at Monday’s auction rose to 10.373 percent from 9.827 percent at a similar auction on Oct. 11, even though the central bank took up only half of the offering.
Weakening pound
Analysts believe the central bank had been supporting the pound and wondered what prompted it to allow it to slide.
"It was all local demand," a dealer at a Cairo-based bank said of Tuesday’s fall.
Some have speculated that the central bank has been buying dollars as a hedge against any capital flight ahead of parliamentary elections later this month and presidential elections next year.
But the pound’s fall against the dollar is all the more disconcerting to investors because it has happened as the dollar has fallen against the euro, the currency of Egypt’s main trading partners.
Since Sept. 10, Egypt’s currency has weakened 10.3 percent against the euro but only 1.2 percent against the dollar. "It seems like the central bank is making people think the Egyptian pound is not a one way bet. They want to increase the risk premium and stop the relentless inflows," one offshore analyst said.
"There are still some outflows, and the central bank doesn’t want to sell dollars. It’s as simple as that," said another.
