Egyptian Pound is the most undervalued currency in EM

23 May, 2017 FT.com

 Egyptian pound ‘cheapest in EM’ after central bank hikes rates – RenCap

Better late than never.Analysts at emerging-market specialists Renaissance Capital had practically given up hope of an interest rate rise from the Central Bank of Egypt after predicting one earlier in the year, but now they see some good opportunities after the central bank finally moved overnight. The CBE surprised observers by increasing all its rates by 200 basis points (2 percentage points), taking the overnight deposit rate to a record high of 16.75 per cent in an effort to combat the country’s eye-watering inflation rate.The central bank has been struggling to contain inflation since it devalued the pound and moved to a floating exchange rate regime last November, as the weaker pound has driven up the cost of food imports. Headline inflation hit an annual rate of more than 30 per cent in April, with food prices climbing at least 3 per cent six months in a row. RenCap had predicted a rate hike would be needed in February or March, and chief economist Charlie Robertson admits that by last week “we wondered if the CBE was just trying to ‘wait out’ the inflation cycle, given how weak domestic demand was”.While the move may have come a little later than hoped, Mr Robertson says it is good news for the Egyptian pound:It shows a commitment to getting inflation back down again, after months where it has consistently been running high.Currency stability – which should be supported by the higher interest rate – will help drive down month on month inflation. Currency appreciation should help more.Despite the inflation difficulties, RenCap thinks the Egyptian pound is the cheapest emerging market currency, with current levels of around E£18 per dollar “cheap” compared to a fair value of between E£14 and E£15 per dollar.The pound did briefly approach those levels at the start of the year, rallying more than 14 per cent in just two weeks. However, analysts had suggested the extent of the climb may have been influenced by CBE intervention and it quickly erased the gains.At publication time the currency stood at E£18.10 per dollar, a 0.5 per cent climb for the day.While the central bank’s move is expected to reduce pressure on prices, the CBE admitted that bringing inflation down will take some time. Policymakers said higher inflation will be “temporarily tolerated”, with the bank targeting a decline to around 13 per cent by the end of next year, and “to single-digits thereafter”.