Investors expect the Egyptian pound to fall further as the North African country awaits final approval from the International Monetary Fund for a $3 billion loan.
Traders in derivatives have increased their bets that Egypt will allow its currency to fall by up to 20% over the next year.
Egyptian Pound Bears Expect Another Drop as IMF Meeting Approaches
As the IMF's executive board prepares to meet on December 16, there is speculation about whether the pace of the pound's spot market decline since November will persuade the Washington-based lender.
According to Gordon Bowers, an analyst at Columbia Threadneedle Investments based in London, there are indications that the currency is still somewhat managed and that the IMF may require additional evidence that Egypt has adopted a flexible exchange rate.
As a result, before the meeting, he anticipates another devaluation or a faster depreciation rate.
Not everybody concurs. Before December 16, according to Mohamed Abu Basha, head of macroeconomic research at the Egyptian investment bank EFG Hermes, further pound weakness is not necessarily conditional.
According to him, authorities have complied with the IMF agreement by terminating subsidized lending programs and creating a new document on state ownership policies.
The country of North Africa devalued the pound first in March and again by 18% on the day she announced the IMF agreement in late October.
As Egypt deals with soaring import costs and a flight of foreign currency that has been made worse by the impact of Russia's invasion of Ukraine, Gulf allies have rushed to the country's aid with pledges of deposits and investments.
After Ghana's cedi, its currency has performed the worst in the world this quarter, plunging to record lows.
Fears of inflation
The currency has lost less than 2% of its value since the beginning of November, as it was trading 24.6 per dollar on Thursday.
However, analysts claim that policy may be constrained by worries about inflation, which is already at a nearly five-year high, and the effect on social stability in the 104 million-person nation.
In the coming months, offshore derivatives traders anticipate steeper declines. For example, on the non-deliverable forwards market, the pound's one-month contract dropped by 6% to 26.5 per dollar, while the 12-month warranty dropped to 30.9 this month.
The latter wager predicts a 20% decline in the currency from its present value. In addition, the central bank's intention to do away with the requirement that importers obtain letters of credit to purchase goods abroad is expected to devalue the currency further.
Egypt must process a backlog of requests for hard currency from importers and businesses that are thought to be worth over $5 billion; doing so is expected to spark a wave of additional pound selling.
According to Monica Malik, the chief economist at Abu Dhabi Commercial Bank, the backlog needs to be cleared up. If the delays persist, the market will be more concerned about the FX regime's flexibility and ability to repatriate funds.
Societe Generale SA's Gergely Urmossy, an emerging markets strategist, based in London, said there is a chance that the pound will fall to 26 by the end of 2023.