Bloomberg: Egyptian pound delivering another strong performance this year
The Egyptian pound is delivering another strong performance this year following a record appreciation in 2019, Bloomberg said in a new article on Wednesday. That is tempting traders who borrow in currencies where rates are low and invest in the assets of countries where they are high to turn to Egypt.
The world’s best carry trade is proving resilient, especially now that a pause in Egypt’s easing cycle is keeping its interest rates elevated, according to Bloomberg.
Even with inflation well below the central bank’s mid-point target for 2020, a cut at its next policy meeting scheduled for February 20 is far from guaranteed. Monetary officials held their key rate at 12.25 percent last month after lowering for three previous consecutive meetings.
Instead of decreasing the base rate, they may continue to loosen policy by injecting liquidity through short-term central bank bonds that are known as open-market operation bills, according to Cairo-based investment bank EFG Hermes. It said there is only a 50 percent chance of a rate cut by next week.
After 450 basis points of easing in 2019, the Egyptian central bank may cut by less than a quarter as much for 2020, “to continue providing decent real rates for carry traders, who are important to maintain a healthy outlook for the Egyptian pound,” EFG analysts Mohamed Abu Basha and Mostafa El Bakly stated in a note.
Egypt’s currency has been on a tear since a 2016 devaluation, a fundamental for a sweeping economic programme backed by a $12 billion three-year loan from the International Monetary Fund (IMF). Foreign investors have injected billions of dollars into the local debt market since then as the world’s $13.3 trillion pool of negative-yielding debt intensifies demand for riskier assets.
Egypt’s local-currency bonds have earned 3.7 percent this year in dollar terms, about four times the average return in emerging markets, according to Bloomberg Barclays indexes. The foreign investors’ holdings in Egyptian debt have roughly doubled since late 2018.
The Egyptian pound is second only to Ghana’s cedi this year, with a growth of more than 2 percent against the dollar. The currency ended 2019 among the world’s top three performers.
Even as inflation rose for a third-straight month in January to 7.2 percent, fanned by rises in the cost of food, Egypt’s real rates remain among the highest worldwide. Overall price growth is expected to remain well within the central bank’s 2020 target of 9 percent, plus or minus 3 percentage points, with Deutsche Bank AG seeing it as low as 6 percent by the end of the year.
Egypt’s central bank will probably opt to wait before cutting, which will allure more portfolio flows into the country, according to Deutsche.
“With rising real rates in the next two months, a cut seems to be more imminent,” Deutsche economists stated in a report. “That said, Egypt’s central bank may continue to keep rates on hold in the February meeting.”