Connecting the dots: The EGP keeps strengthening, yields keep falling: The EGP continued rising against the USD this week, strengthening to a selling price of 17.70 to the USD from around EGP 18.00 last Wednesday. Simultaneously, yields on Egyptian three- and nine-months T-bills fell at Sunday’s auction to their lowest level since May of last year to 18.114% and 18.203%, respectively, as demand surpassed expectation, according to central bank data. The story of the EGP strengthening sets the nation on fire yesterday. Here’s what could be happening:

Possibility #1: supply and demand: The appreciation of the EGP reflects higher demand from both portfolio investors and local banks for T-bills, Pharos Holding Head of Research Radwa El-Swaify tells us. The impact of the demand is more pronounced now that the central bank’s parallel repatriation system for foreign investors has been wound down. She sees the chattering over the appreciation as much ado about nothing, saying it is natural that the EGP will fluctuate. Pharos is leaving unchanged its forecast of an average USD-EGP exchange rate of 18.50 barring any major foreign currency inflows.

Possibility #2: the CBE: “The strengthening of the EGP is worrying and orchestrated,” an unnamed official told Reuters. “It has nothing to do with supply and demand.” To put that in context: CBE Governor Tarek Amer had said last week that January was set to be the first month of net positive inflows for Egypt since May 2018 — and suggested that some volatility in the EGP-USD exchange rate was to be expected. Reuters reported yesterday that Banque Misr and the National Bank of Egypt alone have brought in USD 1.8 bn of inflows in January. And the USD slipped yesterday ahead of US-China trade talks and this week’s Fed decision, as we note in What We’re Tracking Today, above.

A finger on the scale to prove a point? The domestic press has taken it as an article of faith that Amer’s expectation of EGP volatility going forward was more than theoretical. Bankers and other analysts with whom we spoke yesterday are buying into the appreciation being a deliberate weighing of the scales in favor of the EGP to hit back at potential market speculators. All, however, see the EGP depreciating. Amer himself had reiterated that the CBE was out of the currency management business.

Do the appreciation yesterday and Amer’s remarks last week suggest we’re really letting the EGP float? As we’ve previously noted, pundits including Capital Economics and news outlets including Reuters have all suggested that the CBE is using the banking system to indirectly intervene and keep the EGP stable. The parallel repatriation mechanism, which the CBE scrapped last month, also helped in that respect.

The consensus on where the EGP is headed forecasts a gentle slip against the greenback over the coming 18-24 months, with most analysts we’ve surveyed seeing it at about EGP 20 by the end of next year.