According to analysts at Bank of America, there is a strong possibility of the Egyptian pound appreciating in the near term, attributed to improved balance of payments dynamics.
The bank recently stated that the Egyptian currency has shown strong performance since the last liberalization in the first quarter. The bank believes that the carry trade still has potential to perform well in the upcoming months due to sufficient support from the UAE to finance the balance of payments requirements. Additionally, the bank noted that the value of the Egyptian pound seems to be appreciating overall.
The carry trade, also referred to as hot money or foreign investments in Egyptian treasury bills, involves borrowing funds from markets with low interest rates and investing them in markets that offer higher interest rates on their local currency. This strategy seeks to take advantage of the interest rate differential between the two markets. The recent influx of hot money has amounted to over $30 billion.
According to Sada el Balad website Bank of America anticipates that the Central Bank will likely refrain from reducing interest rates in the near future due to concerns about the financial implications of such decreases, and is expected to maintain its cautious monetary policy. Bank of America projects a shift to positive interest rates in the fourth quarter of 2024. Real yields are calculated as the variance between nominal interest rates and inflation.
The bank has stated that it anticipates the pound to appreciate against the dollar due to the disbursement of the second tranche of Egypt’s agreement with the UAE. This disbursement is expected to cover the country’s external financing gap of between $5 billion and $10 billion over a period of one to two years.
“This creates an opportunity to enact reform, improve bilateral debt rollover rates, facilitate favorable multilateral marginal flows (excluding the IMF), attract portfolio flows, and bolster the Central Bank of Egypt’s foreign exchange reserves over the same period,” the statement elaborated.
