After weeks of strengthening against the greenback, the EGP saw a sharp dip yesterday — the first day of trading since Israel and Iran started trading attacks. The USD crossed the EGP 51 mark for the first time since April during trading, before being sold for around EGP 50.66-50.69 at state-owned and private banks by the end of trading yesterday. The dip was the result of foreign investors exiting our local debt market in favor of safer havens, three sources in the banking sector told EnterpriseAM.

The exit requests were carried out through the interbank market, whose trading volume ended the day at around USD 800 mn — significantly above the usual daily volumes ranging between USD 100-150 mn before the regional escalations. The large number of exit requests from foreign investors pressured Egypt’s currency, as the Central Bank of Egypt remains committed to a flexible exchange rate, the sources said.

The CBE ended up accepting t-bill bids totalling only 3.4% of the auction’s target yesterday, with the average yield of submitted bids for nine-month bills hitting 30.044% with some bids as high as 31.750%. The CBE only accepted EGP 1.3 bn of its EGP 40.0 bn target with an average yield of 27.021 — a more than 3.0 percentage point gap from the average yield of submitted bids and a 0.280% increase from the last auction for the same length bills earlier this month. The central bank’s three-month bills auction brought in nearly double its EGP 20.0 bn target, with an average yield of 28.629 — up 0.741% on the last time the bills went to auction.

The depths of the escalation in the coming days will be critical, both in terms of the exchange rate and foreign investment in public debt instruments, the sources concluded. “The exchange rate is the government’s top concern,” one of the sources said, as it will raise the cost of imports and deepen the trade deficit, affecting growth forecasts.

“Any potential fluctuations in the value of the EGP are likely to be driven by the balance of inflows and outflows of foreign portfolio investments — hot money — or in response to upcoming announcements of FDI inflows,” said banking expert Mohamed Abdel Aal. “However, based on both local and global historical experiences, the EGP may come under pressure for a limited and temporary period, after which it would recover under the positive influence of other supportive factors,” he added.

The market is reliant on what happens between Israel and Iran — for better or worse. “If no additional escalation happens later in the night, the conflict could begin to calm in the next few days and the parties involved could start sitting on the negotiating table. Foreign investors are currently following a wait and see approach, testing the market to see how the market reacts to the circumstances,” Ahly Pharos’ Head of Research Hany Genena told EnterpriseAM. “I believe that if nothing else happens tonight, we will see stability in the debt market tomorrow.”

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