EFG Hermes forecast that the Egyptian pound will weaken to 6.00 against the dollar by mid-2011, saying high inflation is likely to prompt the central bank to allow weakness to maintain export competitiveness.
The pound strengthened on Wednesday to 5.8090 against the dollar from 5.8220 on Tuesday. EFG expects the pound to average 5.90 in 2011, down from its previous forecast of 5.75.
Egypt’s central bank "will also be wary of strengthening the USD-EGP so as not to encourage additional portfolio inflows," the investment bank said in a note.
Recent political developments are likely to increase volatility in the local currency, with risks already tilted to the downside given high inflation and a weak euro, it said.
Traders said the central bank has been intervening indirectly to support the pound after selling by some foreign investors concerned that Tunisia’s political turmoil could destabilize the region.
The cost of insuring Egyptian debt against restructuring or default has risen to roughly its highest in 18 months. Credit default swaps for Egypt rose to 315 basis points on Wednesday, up from 308 bps at Tuesday’s close, according to Markit.
