(Bloomberg) -- Egyptian banks are wading into uncharted territory as they start trading currency without central bank restrictions for the first time.
Local lenders traded on the interbank market between 10.30 a.m. and 1.30 p.m. local time in Cairo on Sunday, registering a total volume of $15.8 million, according to Reuters. The weakest rate quoted for the pound was 16.55 per dollar, compared with 16 quoted by the Commercial International Bank late on Thursday and 8.88 before the restrictions were lifted.
“This is low, but expected given that banks have been starved of foreign currency for such a long time,” said Reham ElDesoki, senior economist at Arqaam Capital, a regional investment bank. “Banks will probably use any new inflows they get to satisfy their clients' needs before trading on the interbank.”
The central bank said last week it expects short-term volatility in the exchange rate. Bankers huddled on Friday to lay out guidelines that would regulate trading and will share the suggestions and recommendations with the central bank, according to four people who either attended the meeting or were briefed on the discussion. They spoke on condition of anonymity.
Seeking Investment
The pound weakened 45 percent against the dollar on Thursday after policy makers decided to float the currency to ease a dollar crunch and attract investment. The float is intended to help Egypt secure a $12 billion loan from the International Monetary Fund, which officials say will help restore investor confidence in an economy battered by years of turmoil. Finance Minister Amr El-Gahry said the government will ask the IMF's executive board within a day or two to convene to consider the loan bid.
“The market is currently undergoing a phase of price discovery, and it is positive that the central bank said it would not to intervene during that initial phase,” said Hany Farahat, the Cairo-based senior economist at CI Capital.
Egypt's benchmark EGX 30 index soared 6.1 percent to 9,349.9, its highest since March 2015, at close in Cairo.
Mubarak Fall
The central bank had maintained a tight grip on the official exchange rate after the 2011 uprising that toppled President Hosni Mubarak. Officials now say they won't use the country's foreign reserves to defend the pound.
The new system aims at ending a black market that has flourished over the past year. The central bank raised interest rates by 300 basis points to the highest level in more than a decade and allowed lenders to operate on weekends to attract dollars.
National Bank of Egypt and Banque Misr -- Egypt's two biggest commercial banks -- bought a total of $35 million on Thursday and Friday, their chairmen told Bloomberg News on Saturday. Central bank Governor Tarek Amer said banks bought eight times more dollars on Thursday than in the “previous period,” without providing more details.
CI Capital's Farahat said it will take time for investors to trust the new system. Meanwhile, the expected volatility in the exchange rate will make it attractive for dollar holders inside Egypt.
“The price of the pound must first stabilize in the interbank market before we see major portfolio inflows,” Farahat said. “It will happen gradually over the coming months, not overnight.”
(An earlier version of this story misstated the volume of interbank trade.)
--With assistance from Ahmed A. Namatalla To contact the reporter on this story: Ahmed Feteha in Cairo at afeteha@bloomberg.net. To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Amy Teibel, Mark Williams
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