Macro Analysis /

Egypt's Eurobond curve bull steepens, USD regains its mojo

  • Forex: Kenyan shilling set to remain on the back foot

  • Fixed Income: Egyptian Eurobonds rally after the CBE surprises markets by leaving interest rates on hold

  • Macroeconomic: Grain prices continue to fall as Ukraine increases exports

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
19 August 2022
Published byETM Analytics


It has been a really strong week for the USD and at the core was the guidance offered by Fed officials, who confirmed that the central bank would continue lifting interest rates in a bid to regain control of inflation. St Louis Fed President Bullard questioned why people would rather adopt a slower approach to hiking and drag the tightening on into 2023. He gave the impression of further aggressive tightening and simply confirmed that the Fed has been behind the curve and is playing catch up. That may assist the USD for now but will come as a shock to the economy that will eventually reflect the negative impact of this aggressive tightening, especially as it impacts the property market and household balance sheets. The EUR-USD is collapsing towards parity and is trading below 1.0080 this morning, while the GBP has dropped below 1.1900.

US Treasury futures are heading higher this morning in early trade, with traders digesting some further hawkish Fed commentary, while also positioning for next week’s Jackson Hole central bank symposium. The 10yr US benchmark is back above 2.900% and is set for its third straight weekly gain. The 2yr, meanwhile, saw yields edge lower overnight despite some stronger than expected US data yesterday and the hawkish Fed talk, but yields are rising once again this morning. Investor concerns regarding inflation are still elevated, with this highlighted by yesterday’s 30yr US TIPS auction, which saw strong demand and was priced much higher than expected. With these concerns and a hawkish Fed, the risk remains that yields could push higher into next week’s central bank event, keeping general risk sentiment under pressure. Bunds, meanwhile, had a more contained session yesterday, while gilt yields continued to rise as the market prices in more BoE rate hikes after this week’s CPI numbers. Aussie bonds, finally, are also under pressure in Asian trade this morning with the 10yr yield rising towards 3.400%. It is quite clear, therefore, that the general bias for core bond market yields is up.


Egypt: Data from the Central Agency for Public Mobilization and Statistics showed that Egypt's trade deficit narrowed in May. Specifically, the trade deficit fell by 35.8% to $2.61bn in May 2022, compared to $4.06bn in the same month of 2021. A breakdown of the data showed that the narrowing resulted from an increase in outbound shipments and a fall in imports. Exports jumped 18.3% y/y to $4.01bn in May amid an increase in the value of exports, including petroleum and natural gas products, crude oil, fertilizers, and ready-made clothing. Meanwhile, the value of imports amounted to $6.62bn in May, falling by 11% from $7.45bn in the corresponding month in 2021. While the trade balance reading improved, the account remains in deficit territory, which will detract from the current account balance and, by extension, the currency.

Nigeria: After struggling to repatriate funds from Nigeria, Emirates airlines plans to stop all flights to and from Nigeria from September 1, 2022. The airline said that that decision was taken to limit further losses and impact on its operational costs that continue to accumulate in the market. Last month, Reuters citing a letter sent to the Nigerian government reported that the airline was planning to reduce the number of flights from Lagos as $85mn has been stuck in the country as of July. That figure had been rising by $10mn per month. Expectations are that more airlines could follow suit should the Central Bank of Nigeria, which restricts access to foreign currency to tackle a severe dollar shortage, does not address the airlines' issues.

Nigeria: Central Bank of Nigeria Governor Godwin Emefiele yesterday said that the bank is aiming to boost the adoption of the e-naira almost ten-fold in the next 12 months by targeting people without bank accounts. Nigeria has attracted just 840K users for its digital currency since October 2021, and the bank is now targeting 8mn users in the "second phase" of the currency's expansion. While the e-naira is viewed as an exciting project, it is worth noting that accelerating inflation and a weakening currency have deterred its adoption, with many citizens turning to cryptocurrencies despite the CBN ordering commercial lenders to stop transactions or operations in digital tokens.

Southern Africa: The Southern African Development Community extended its mission in Mozambique yesterday. The mission has been helping the Mozambican government for more than a year to fight an Islamic State-linked insurgency. While the length of the extension was not revealed, it will be positive news for Mozambique and the European Union. The EU is reportedly planning a five-fold increase in financial support to the mission as a terrorist insurgency in Mozambique threatens gas projects meant to reduce the EU's dependency on Russian energy. The energy squeeze due to the Ukraine war has added impetus to Europe's scramble for gas off Mozambique's northern coast, where Western oil firms are planning to build a massive liquefied natural gas (LNG) terminal.

Zimbabwe: To help raise funds needed to compensate former white farmers for improvements to farms seized from 2000, Zimbabwe is reportedly considering selling bonds on the Johannesburg and Victoria Fall stock exchanges. According to the CEO of the Victoria Falls exchange, discussions are at a "preliminary stage." In 2022, the Zimbabwean government agreed to repay farmers displaced off their properties a total of $3.5bn over four years but missed a $1.75bn payment due last month.

Oil: Oil rallied yesterday, with Brent rising over 3.00% and WTI up 2.70% on the session amid signs that US fuel demand has remained resilient. The front-month Brent contract is thus trading back above $96 per barrel, while WTI has risen back through the $90 per barrel mark. Despite the gains yesterday, oil is set for another weekly loss as declines earlier in the week owing to global economic growth concerns, and the potential return of Iranian supply have more than offset the increases seen over the last two sessions. Liquidity conditions in the market are also still a factor to keep track of as they have led to increased volatility in prices over the last few months. The futures curve, meanwhile, continues to point to easing pressure within the market towards the end of the year, with the January 2023 future pricing Brent near $90 per barrel and then dropping towards $80 towards the middle of next year.

Forex: Kenyan shilling set to remain on the back foot

The Kenyan shilling remained on the back foot yesterday, adding to its year-to-date drop of almost 6% against the USD. The shilling weakened as demand for hard currency across all the sectors picked up in the aftermath of the August 9 general election. That demand was not matched by supply in a recurring theme this year. Increased dollar demand has not been matched by supply amid reduced inflows from key export earning sectors. While remittance inflows have remained strong, agricultural export earnings dropped 17% in the first quarter from a year earlier, and tourism income is projected to slow this year, according to the central bank’s projections.

Demand for the dollar is set to grow further in the coming days, while supply will remain low as offshore investors remain wary of the local market owing to a lack of liquidity. This suggests that the shilling is set to remain under pressure in the near-term, extending the current bearish trend. Note that the shilling weakened for the 14th straight month in July, the longest stretch of monthly losses on record.

From a valuation perspective, the shilling remains extremely overvalued on a real effective exchange rate basis suggesting further room for depreciation exists. It is also worth noting that in the non-deliverable forwards market, the 12-month contract is pricing in depreciation of more than 23%.      

Fixed Income: Egyptian Eurobonds rally after the CBE surprises markets by leaving interest rates on hold  

The Central Bank of Egypt surprised markets on Thursday after its Monetary Policy Committee voted in favour of leaving its lending rate unchanged at 12.25% and its deposit rate at 11.25%. The decision to keep rates on hold came just hours after a new governor was named to replace Tarek Amer, who quit unexpectedly on Wednesday.

The MPC said in its statement accompanying the rate decision “that keeping policy rates unchanged remains consistent with achieving price stability over the medium term," while taking note of its policy rate hikes in previous meetings. Recall that the CBE raised its benchmark interest rates by 200bps in May and 100bpd in March to combat the adverse impact of the war in Ukraine on inflation.

With Egypt’s real interest rate still deeply negative, yesterday’s move suggests that the central bank wants to move cautiously during the transition period. Moreover, it is worth adding that the decision to leave rates comes on the back of moderating inflation risks with global commodity prices, the main driver of inflation in recent months, correcting lower. That said, we still assess the risk of further currency weakness to be significant.

The CBE’s decision to leave rates on hold provided a fresh tailwind for Egyptian Eurobonds. For context, the 2026 Eurobond yield shed 59bps on Thursday to close the session at 12.22%, its lowest level in 2 months. Looking at the shape of the curve, after temporarily inverting at the end of last month, there has been a considerable steepening bias present as traders reprice for a less aggressive interest rate path amid mounting growth concerns and easing external price pressures. At the time of writing, the 10v3 Eurobond yield spread stood at 160bps vs -6bps at the end of July.

Macroeconomic: Grain prices continue to fall as Ukraine increases exports

Since Ukraine has re-entered the grain market, we have seen a correction lower in global food prices. Since the start of the month, more than 500k tons of foodstuffs, abroad 21 ships have been exported from a major port in the Black sea. However, this amount is far from the amount Ukraine exported before the war. Nevertheless, the amount of ships arriving to be loaded with grains has been increasing, which is an encouraging sign that exports are rising.

Earlier this week, five ships were expected to arrive at its Chornomorsk black sea port, which will be loaded with more than 70k tonnes of agricultural products. This is the biggest convoy of ships to arrive in one day since the UN-brokered grain export deal came into effect. Kyiv has said that it hopes to increase the monthly volumes of sea exports to 3 million tonnes in the coming future to clear the backlog of 18 million tonnes of grains left over from last year's harvest.

High international food prices have been one of the main drivers of inflation and, in many countries, have resulted in a cost of living crisis. The decline in food prices will provide relief for food import-dependent countries. Many African countries have been hit hard by high grain prices. Therefore, a correction lower in global food prices will improve the lives of many people in Africa. The UN chief stated that even though it will take a lot more than Ukraine exporting grains to resolve the current global food crisis, the increased supply will help to tame the prices and stop them from spiralling out of control.