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Wednesday, 30 January 2019

Take note FX watchers: The carry trade is back in Egypt

Carry traders are back in force, buying 100% of Monday T-bonds auction: Foreign investors, who have been increasingly showing up at government debt auctions, bought 100% of the EGP 1.16 bn worth of five-year treasury bonds offered on Monday, the Finance Ministry said in a statement. The central bank also held yesterday an auction on 10-year bonds. Foreigners have snapped up an average of 30% of T-bill auctions, and their average participation in five- and 10-year note auctions rose to about 55% this week. The story is getting plenty of play in the international business press: Bloomberg and Reuters have the story.

Why this matters: International investors pulled about USD 10 bn out of Egypt during the emerging markets zombie apocalypse, putting pressure on the central bank and the banking system at large.

Why are the foreigners back? We now offer the second-highest yield in emerging markets after Argentina, according to analysis by Bloomberg. We’re also a bit less likely to default than Argentina, our friend Reham El Desoki told the business information service: Investors “perceive lower risk in the medium-to-long term, which is positive.”

It’s probably why the EGP appreciated against the greenback this week: The central bank’s statement on the auction comes after the EGP has been appreciating this week. While some analysts and bankers see the invisible hand of the CBE at play here, others we have spoken to have said the move was down to carry traders participating in auctions. The results of the T-bond auction back that up.

Does this tell us anything about interest rates? “The demand is probably driven by an anticipation that the central bank could start cutting interest rates as inflation eases,” Bloomberg said, citing comments from El Desoki.

High demand is making it a bit less expensive for Egypt to borrow, Bloomberg said in another piece: “demand for the five-year securities allowed underwriters to shave 44 basis points off Egypt’s cost to borrow, the most at an auction in a year, to 17.59%,” it reported.

This is all great news ahead of Ramadan: The boost in inflows is good news: New foreign appetite, if sustained, could help shore up the EGP just as we head into a season of high domestic demand for FX as Ramadan approaches and China’s holiday lull ends.

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