The Egyptian currency has strengthened by about 4% against the dollar since Friday, outperforming all other currencies worldwide. On Wednesday, it surpassed the 50-per-dollar mark for the first time since March 3 and has risen by more than 7% since the beginning of May—also the best performance among all currencies worldwide during this period.
The pound came under pressure after the war with Iran began in late February, when rising energy prices threatened to strain Egypt’s budget and increase costs for a population already worn down by years of high inflation.
“In the short term, people look at who was the underdog, and Egypt is an obvious candidate,” said Tays Low, a portfolio manager on Ninety One’s emerging markets team in London. “I wouldn’t be surprised if the Egyptian pound returns to somewhere close to its pre-crisis level.”
A week before the war began, the pound was trading at around 47.9 to the dollar.
According to Lowe, Egypt’s dollar-denominated bonds were also among the “hardest hit” during the war and are now rising as investors return. “I think the inflow of funds will continue,” he noted.
Oil prices have fallen by 15% over the last four trading sessions on speculation as the U.S.-Iran deal to reopen the Strait of Hormuz is expected to free up new supply and ease inflation fears, especially for energy importers such as Egypt. This decline has bolstered risk appetite in emerging-market asset markets.
Egypt’s dollar-denominated bonds have risen by an average of more than 3% since the agreement was announced, making them the fourth-highest-yielding among emerging markets, according to Bloomberg.
Earlier this week, Citigroup strategists recommended buying Egyptian bonds denominated in local currency, citing hopes that the U.S.-Iran agreement would ease the pressure that oil prices are exerting on the North African country’s economy.
The introduction of a flexible exchange rate is a key component of the IMF’s $8 billion extended credit program for Egypt, which is set to conclude this year. The Fund is currently conducting the seventh review of the program; a successful completion of this review this summer will unlock the next tranche of approximately $1.6 billion.
