World’s Best Carry Trade Thrives With Egypt’s Rates on Pause

(Bloomberg) -- The world’s best carry trade is proving resilient, especially now that a pause in Egypt’s easing cycle keeps its interest rates elevated.

The Egyptian pound is delivering another strong performance this year following a record appreciation in 2019. That’s enticing traders who borrow in currencies where rates are low and invest in the assets of countries where they are high to turn to Egypt.

Even with inflation well below the central bank’s mid-point target for this year, a cut at its next policy meeting on Feb. 20 is far from guaranteed. Monetary officials held their key rate at 12.25% last month after lowering at the previous three meetings.

Instead of decreasing the base rate, they may continue to loosen policy by injecting liquidity via short-term central bank bonds known as open-market operation bills, according to Cairo-based investment bank EFG Hermes. It said there’s only a 50% chance of a rate cut next week.

After 450 basis points of easing in 2019, the central bank may cut by less than a quarter as much this year, “to continue providing decent real rates for carry traders, who are important to maintain a healthy outlook for the Egyptian pound,” EFG analysts Mohamed Abu Basha and Mostafa El Bakly said in a note.

The currency has been on a tear since a 2016 devaluation, the cornerstone of a sweeping economic program backed by a $12 billion loan from the International Monetary Fund. Foreign investors have pumped billions of dollars into the local debt market since then as the world’s $13.3 trillion pool of negative-yielding debt intensifies demand for riskier assets.

Egypt’s local-currency bonds have gained 3.7% this year in dollar terms, about four times the average return across emerging markets, according to Bloomberg Barclays indexes. Foreign holdings in Egyptian debt have roughly doubled since late 2018.

The pound is second only to Ghana’s cedi this year, with an increase of 2.2% against the dollar. It ended 2019 among the world’s top three performers wtih a gain of almost 12%.

Even as inflation inched higher for a third-straight month in January to 7.2%, fanned by increases in the cost of food, Egypt’s real rates remain among the highest globally. Overall price growth is likely to remain well within the central bank’s 2020 target of 9%, plus or minus 3 percentage points, with Deutsche Bank AG seeing it as low as 6% by the end of the year.

The central bank will probably opt to wait before cutting, which will attract more portfolio flows into the country, according to Deutsche.

“With rising real rates in the next two months, a cut seems to be more imminent,” Deutsche economists said in a report. “That said, Egypt’s central bank may continue to keep rates on hold in the February meeting.”

--With assistance from Netty Ismail, Abeer Abu Omar and Mirette Magdy.

To contact the reporter on this story: Paul Abelsky in Dubai at pabelsky@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Wallace, Alex Nicholson

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