CAIRO: Foreign investors are moving back into Egyptian Treasury bills, pushing yields lower, in the hope that the Egyptian pound has finally bottomed out and may appreciate in coming weeks or months.
The average yield on 91-day T-bills sank to 9.501 percent on Sunday, its lowest level in more than two years. The yield peaked at 10.179 percent in late June, when investors were fleeing risk during the euro zone’s sovereign debt crisis.
Foreign investors have poured about $1.5 billion into Egyptian T-bills in the past three weeks, a considerable acceleration from previous months, estimated a London-based analyst who asked not to be identified.
That amount would account for nearly a third of the LE 24.5 billion ($4.3 billion) of T-bills with maturities of up to 364 days auctioned since July 22. Complete, up-to-date figures for foreign buying of Egyptian debt are not available.
In contrast to Egyptian Treasury bonds, which not very liquid, there is a lively secondary market in T-bills, which limits risk for foreign investors.
One reason for the renewed interest in short-term Egyptian debt is a return of appetite for high-yield, high-risk instruments among global investors as the euro zone crisis has eased over the last several weeks.
Currency trend
Another, related reason is a partial rebound of the Egyptian pound. After sliding from a peak of 5.40 against the US dollar in January this year to 5.70 in late July, the pound has bounced slightly off technical support at 5.70, the March 2009 low. It hit a high of 5.66 at the end of last week.
Technically, the pound also shows signs of having ended a shorter-term downtrend against the euro; now at 7.40, it broke this week above its downtrend channel from early June as 14-day momentum showed a positive divergence.
When the dollar strengthened during the euro zone crisis, Egypt allowed its currency to weaken against the dollar and the currencies of its main trading partners.
Analysts say the Egyptian pound could now rise in coming months as the government seeks to offset the effect of rising world commodity prices, particularly the price of wheat, which has surged because of Russia’s drought. Egypt is a major wheat importer.
"In the last six months the central bank has been deliberately weakening the currency, so it might abandon this policy," said Shahin Vallee, head of emerging market foreign exchange strategy at BNP Paribas in London.
Vallee said heavy foreign interest in Egyptian T-bills came after markets started betting that world food prices were on the rise and that the central bank would let the Egyptian pound appreciate.
"People like the Egypt macro story," a London-based trader said on condition of anonymity. "They believe that we’ve had depreciation. We’re at a turning point in the FX. You’ve got a lot of people jumping in the trade."
Egypt’s economy grew 5.3 percent in the fiscal year to the end of June, accelerating from 4.7 percent in the previous 12 months, according to government data. The government has forecast growth of at least 6.5 percent this fiscal year.
"This indicates a near full recovery from the global crisis and a return to the path of rapid economic growth similar to the period before the global crisis," Economic Development Minister Osman Mohamed Osman said late last month.
Tighter monetary policy might conceivably support appreciation of the Egyptian pound toward the end of this year. Vallee said a major, further fall in government debt yields was unlikely as the central bank could begin leaning toward raising benchmark interest rates as 2010 draws to a close.
Urban consumer inflation in Egypt was steady at 10.7 percent in the 12 months to July, the state-run CAPMAS statistics agency said on Tuesday, but prices jumped on a monthly basis.
A 38.2 percent retracement of the Egyptian pound’s fall against the dollar since January this year — a reasonable minimum expectation if the Egyptian currency has indeed ended its downtrend — would bring it to 5.59.
NDFs
Given how small the pound’s rebound has been so far, however, some traders will want to wait for clearer signs that the currency has bottomed before betting on appreciation.
A fall of emerging market currencies on Wednesday, on concern about a faltering US economic recovery after a pessimistic assessment by the US Federal Reserve, suggested confidence remained fairly fragile.
Another analyst said, "Fundamentals support more appreciation (of the Egyptian pound), but it is not happening for the moment."
One market which has failed to revive along with Egyptian T-bills is Egyptian pound non-deliverable forwards, which are contracts for notional currency trades settled on future dates.
The NDF market boomed late last year, with traders estimating notional turnover of between $100 million and $200 million on some days, as NDFs were used to speculate.
Turnover shrank this year as buyers fled risk because of the euro zone crisis, and volume remains modest, partly because of uncertainty about the trend in the spot market, traders said.
"Most of the interest now is in the actual onshore cash market," said a London-based currency trader. "There’s always little bits and pieces going on, but the main investments happening now are real-money accounts."
The trader added, "When spot moves so violently, people don’t know what to do — they tend to sit on their hands" (in the NDF market) a bit and not do too much."
