USD/EGP Short:
The annual inflation rate in Egypt rose to 37.4% in August 2023, up from 36.5% in the previous month. This has continued to put pressure on USD/EGP, with higher domestic prices incentivizing Egyptians to shop abroad using foreign currencies. This has weakened the Egyptian pound, with black market exchange rate soaring to 41 pounds per dollar, above the official rate of approximately 31 pounds per dollar.
In response, Egyptian banks have restricted the use of Egyptian pound debit cards abroad. The move was “due to the country's foreign exchange shortage” according to Arab African International Bank. This restriction underscores the weakness of the Egyptian central bank, as it turns to commercial banks to stop the country from bleeding FX reserves. Egypt’s foreign exchange reserves have sunk by over 22% since 2020 as the central bank attempts to support its peg to the dollar.
Increasing inflation, divergent black market and official exchange rates, as well as falling FX reserves mean that the Egyptian central bank may be forced to abandon the current currency peg in favour of a new peg after a devaluation. This could be an opportunity for investors to short the Egyptian pound with limited downside. If the central bank succeeds in maintaining the peg, then there will be no appreciation in the Egyptian pound.
US Bonds:
10-year U.S. Treasury bond yields have surged to 16-year highs, driven by a new era of higher interest rates. Yields in excess of 4.7% have made bonds a more attractive investment.
With central banks around the world watching inflation figures subside, mid-term interest rate cuts could make high-yield bonds more valuable and add capital gains onto bond yields, making bonds an even more attractive investment.
EU Property Market Recovery:
According to ECB Governing Council member Mario Centeno, "We can expect that the rate cycle has been completed by now, and with present conditions”. Centeno said the ECB's September decision "brought the necessary predictability of monetary policy, by explicitly mentioning that the current level of interest rates is compatible with the convergence of inflation in the medium term towards the objective" of 2%.
The top of the interest rate cycle may provide an attractive entry point into EU property equities, as beaten-down landlords and developers may benefit in the mid-term from stabilizing property markets from the prospect of interest rate cuts.
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