Will Egyptian pound’s uptrend continue?

 

Will Egyptian pound’s uptrend continue?

 

By Ahmed Kamel

The greenback has shed more than LE0.4, or 2.5 per cent, of its exchange rate versus the pound since the beginning of 2020. The US currency fell below LE15.6 on the local foreign exchange market, ushering in hopes that the pound may continue its gains in the medium term.

Against all odds, the pound has strengthened despite the economic slowdown caused by the partial lockdown between mid-March and the end of June. The outlook of the foreign exchange market in Egypt will be determined by a slew of complicated factors.

Undoubtedly, the external determinants, which comprise US domestic political and economic factors as well as the global situation of the Covid-19 pandemic, will have the final say in setting pace of the world economic recovery and international trade.  

Moreover, the local demand for the greenback is another key factor. The supply and demand mechanism and how both the global and domestic determinants interact have different scenarios.

In an optimistic scenario, the US Federal Reserve will maintain an easing monetary policy under the next administration of President-elect Joe Biden. A smooth transition of power in the White House, instating Biden for the coming four years would soothe trade tensions between Washington and Beijing.

Stabilized trade conditions between the world’s two economic superpowers will consequently pave the way for a global economic stability. With the coronavirus under control, the US dollar may keep present value worldwide. Such a hopeful scenario will be highly advantageous for emerging markets, including Egypt.

In such a case, the pound will continue its uptrend in the short term and through 2021. In a less optimistic scenario, there might be major changes. The persistence of the present hardships bodes ill for the global economy in general and emerging markets -- which heavily rely on inflows of direct investment -- in particular.

Under the Donald Trump administration, precarious economic conditions emanating from a global trade war had sent shockwaves into commodity markets as the US, China and the European Union hit one another with tariffs before the Covid-19 pandemic fettered the whole world.    

The external factors will play a key role in tourism recovery, which is major hard currency resource for Egypt. A global economic recovery will put tourist arrivals back on track. That would ensure further gains for the Egyptian currency versus the dollar.

From the domestic perspective, the government and the Central Bank of Egypt (CBE) have been working hard to contain the repercussion of the Covid-19 pandemic. Here it should be well noted that the aforementioned external factors affect Egypt’s hard currency resources.   

Remittances from Egyptian expatriates are of crucial significance. Despite the negative impacts of the coronavirus, the remittances from Egyptians abroad rose to an all-time high at $27.8 billion in the fiscal year 2019/20, according to data from the

Egypt’s four major hard currency earners – tourism, remittances from Egyptian expats, the Suez Canal and exports – should ensure a safe level of net international reserves at the central bank in the medium term.