The Egyptian pound strengthened the most since November against the dollar after the central bank acted to slow declines in the currency amid protests demanding the ouster of President Hosni Mubarak.
“We saw excessive speculative activity so we intervened to stabilize the market,” Deputy Central Bank Governor Hisham Ramez said in a telephone interview from Cairo today. He declined to provide further details.
The pound rose 1.3 percent, the most since Nov. 1, to 5.8780 against the dollar at 4:44 p.m. in Cairo, following a 1.6 percent decline yesterday. Three-month non-deliverable forwards rose 0.8 percent to 6.18 per dollar. The contracts reflect bets the currency will weaken 4.9 percent in three months.
The pound weakened to a six-year low this week after anti-government protests continued in the North African country, killing about 300 people, according to the United Nations. Negotiations between opposition leaders and Vice President Omar Suleiman on constitutional changes needed to end Mubarak’s 30-year rule made “big progress,” Egyptian billionaire Naguib Sawiris, a participant in the talks, said yesterday. The government raised most of the 15 billion Egyptian pounds ($2.5 billion) sought at a debt auction yesterday.
“It’s positive, but it opens a Pandora’s Box because it could entice the market to put pressure on the pound and for the Central Bank of Egypt to keep supporting it,” said John Sfakianakis, chief economist at Riyadh-based Banque Saudi Fransi. “We just have to see if the intervention had a directional effect tomorrow.”
Egypt’s credit risk is falling to the lowest level since anti-government protests began Jan. 25 and international borrowing costs have receded from a record high. The cost of insuring Egyptian sovereign debt declined 1 basis point, or 0.01 percentage point, from yesterday’s London close, to 344, according to CMA prices. The yield on the 5.75 percent bond due in April 2020 has dropped 89 basis points since reaching a record 7.2 percent on Jan. 31, data compiled by Bloomberg show. Yields rose 11 basis points to 6.3 percent today.
The government carried out its first auction since Jan. 27 yesterday, selling a combined 13 billion pounds of bills. Yields on the 91-day notes rose 147 basis points to 10.97 percent, the highest rate in two years. The yield is down from 14 percent in the aftermath of Lehman Brothers Holdings Inc.’s collapse in September 2008.
The central bank action "shows a commitment from the central bank to limit the slide in the pound,’’ Dina Ahmad, foreign exchange and fixed-income strategist at BNP Paribas SA in London, wrote in an e-mail today. “We still expect more weakness in the pound to come in the coming weeks but expect the move to be more gradual given the bank’s intervention.”
UBS AG forecast Feb. 4 that the pound could depreciate 20 to 25 percent over the next month.
Demonstrations continued today with thousands camping out in tents even after the government vowed progress within a month toward free elections. Opposition groups rallied around Mohamed ElBaradei, the former head of the United Nations nuclear agency. The nation’s stock market remained closed after the benchmark index slid 16 percent in the week ended Jan. 27.
In an attempt to placate the protesters, Finance Minister Samir Radwan said Feb. 5 that the government won’t reduce subsidies even if global prices of food and commodities rise. Public spending will be used as a tool to “achieve social justice,” he told a news conference in Cairo.
An increase in public spending may push the budget gap to “double digits” in 2011, compared with 8.1 percent in the fiscal year that ended in June, Standard & Poor’s said last week after lowering the country’s credit ratings by one level to two below investment grade. Fitch Ratings and Moody’s Investors Service also cut Egypt’s ratings.
London-listed global depositary receipts of Orascom Construction Industries, dropped 2.6 percent to $40.87 after surging 4 percent yesterday. The Cairo-based company said in a statement yesterday that it has resumed work on 90 percent of its sites in the Arab country. Orascom Telecom Holding SAE fell 0.3 percent to $3.28.