Un­cer­tainty and con­fu­sion as Egyp­tian pound floats Withdrawal of CB leaves deal­ers with­out guid­ance

Kuwait Times - - BUSINESS -

In a Cairo bank, for­eign ex­change traders clus­ter anx­iously around a deal­ing ter­mi­nal, pre­par­ing to make their first trans­ac­tion since the cen­tral bank floated the cur­rency. “Should we en­gage?” one trader won­ders. “What should we quote?” asks an­other.

Deal­ers have been thrown into tur­moil by the cen­tral bank’s Nov. 3 de­ci­sion to let the Egyp­tian pound trade freely for the first time in or­der to boost com­pet­i­tive­ness and un­lock IMF loans and for­eign in­vest­ment. Af­ter years of look­ing to the cen­tral bank for guid­ance, they scram­bled to find their own prices in the first week of the float, con­tribut­ing to wide spreads, volatile quotes and ul­tra­thin trad­ing vol­umes as they cau­tiously tested the sys­tem.

At one point on Tues­day, bid and ask quotes for the pound against the dol­lar ranged from 16.65/17.35 at one bank to 17.80/18.30 at an­other. Un­til last week it was pegged at 8.8 to the dol­lar.

“We are not used to this. We are used to Daddy guid­ing us and set­ting the price,” one trader said of the cen­tral bank’s ab­sence. “But Daddy is not here any­more.” Egyp­tian banks have ex­pe­ri­enced a more flex­i­ble ex­change rate be­fore, but have never had this level of free­dom. Be­tween 2003 and 2013, Egypt had a man­aged float­ing sys­tem which al­lowed the cen­tral bank to in­ter­vene heav­ily in the cur­rency mar­ket through two banks-Suez Canal Bank and Arab African In­ter­na­tional Bank-who acted as mar­ket mak­ers.

With for­eign re­serves dwin­dling af­ter the 2011 up­ris­ing that drove off tourists and for­eign in­vestors, the cen­tral bank be­gan to in­ter­vene more ag­gres­sively to de­fend the pound against down­ward pres­sure. From 2013 un­til last week, it kept the pound pegged in a tight range against the dol­lar, ra­tioning dol­lar sup­ply through cen­tral bank auc­tions that cre­ated a se­vere short­age and pushed com­pa­nies to ob­tain for­eign cur­rency on the black mar­ket.

For three years, bank deal­ers re­call, they rarely glanced at the price pages on their deal­ing ter­mi­nals, which were mostly sta­ble. Trad­ing mi­grated to a boom­ing black mar­ket in hard cur­rency, where prices changed from one hour to the next.

But as mar­kets opened on Sun­day, the first trad­ing day af­ter the float, traders were glued to their screens watch­ing bid and ask quotes change con­stantly.

“There is con­fu­sion, for sure, and that re­flects in the pric­ing,” said a banker at a pri­vate bank who, like most of his peers, de­clined to be named be­cause of com­mer­cial sen­si­tiv­i­ties.

COM­PET­ING FOR DOL­LARS

As the pound drifts lower to lev­els that are cheap enough to at­tract dol­lars into the in­ter­bank mar­ket, com­pe­ti­tion among banks seek­ing to hoover up green­backs has be­come fierce. Bank branches have been stay­ing open un­til 9 p.m. to try to per­suade or­di­nary Egyp­tians to sell their dol­lars, while many have turned to the for­mer black mar­ket for their hard cur­rency needs, suck­ing liq­uid­ity bank into the for­mal bank­ing sys­tem.

“Banks are act­ing like a black mar­ket, rais­ing prices on each other and steal­ing each other’s clients by of­fer­ing higher rates to buy dol­lars,” one frus­trated trader said. Long gone are work­ing days that be­gan at 9 a.m. and ended in the late af­ter­noon, as deal­ers work late into the night to source for­eign cur­rency for dol­lar-hun­gry clients.

“The price is cre­ated by de­mand and sup­ply un­til we reach equi­lib­rium... Giv­ing guid­ance, that does not make any sense,” a trader at a pri­vate bank said. But un­cer­tainty means it could take months for the in­ter­bank mar­ket to be­come fully func­tional and the pound to sta­bi­lize.

Bankers said there was no con­sen­sus on where the pound would sta­bi­lize, with some be­liev­ing it might hit 20. That has raised spec­u­la­tion that the cen­tral bank may step in, per­haps us­ing sta­te­owned banks to in­ject dol­lars once the first $2.75 bil­lion in­stall­ment of Egypt’s IMF loan ar­rives.

The au­thor­i­ties ex­pect to re­ceive that money as early as next week, part of a $12 bil­lion loan pack­age they hope will avert an eco­nomic cri­sis and halt the slide in the cur­rency. “As long as there is a scarcity of dol­lars, they will keep rais­ing prices like the black mar­ket was do­ing be­cause they want to suck up dol­lar liq­uid­ity,” said Abu Bakr Emam, head of re­search at fi­nan­cial firm Prime Hold­ing.

“We have a cri­sis in liq­uid­ity and the cen­tral bank can re­solve that.” —Reuters

HONG KONG: A stu­dent runs past a man check­ing his phone in front of a dis­play show­ing bank notes of dif­fer­ent cur­ren­cies in Hong Kong yes­ter­day. Share mar­kets plunged yes­ter­day and the dol­lar tum­bled against the yen and the euro as Don­ald Trump was elected US pres­i­dent, in a stun­ning up­set with ma­jor im­pli­ca­tions for the world econ­omy. —AFP

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