Today’s Trading Playbook
Mona Bedeir | Chief Economist
KEY THEMES
Today's MPC meeting comes at a time when the shadows of two main historical events reemerged on the horizon, clouding the path of monetary stance.
First, the shadow of May 2013, when the financial shock waves hit many emerging markets (EMs) in what was known as “taper tantrum”, appears on the surface on the back of the recent higher U.S. treasury yields. In 2013, the shift in market sentiment regarding EMs came after a prolonged period of monetary easing in advanced economies, which was essential for preventing the worst of the global financial crisis, and during which emerging economies attracted large inflows of foreign capital. However, as the Fed started to taper its purchase of treasuries, volatility in financial markets increased with sharp corrections in EM asset prices and exchange rates, resulting in a reversal in capital flows. Recently, we have seen the 10-year U.S. Treasury yield shoot to its highest level in a year, driven by rising inflation expectations on the back of growing optimism of faster-than-expected economic growth and the spillover effect of the accommodative monetary policy and a very expansionary fiscal policy. While the Federal Reserve kept rates anchored near zero and maintained the current pace of asset purchases in its last meeting yesterday, there was some hawkish lean among FMOC members' expectations for rates, but not enough to change the forecast. According to the “dot plot” of individual members’ forecasts, 4 of the 18 FOMC members were looking for a rate hike in 2022, compared with just one at the December meeting. For 2023, 7 members see a hike, compared with 5 in December. Thus, most central banks in EMs will remain vigilant, given the strong correlation between the Fed’s monetary policy and the movement in asset prices and capital inflows. Dollars that have been invested in EMs started already to move back home as capital inflows to EMs fell in February, just to remind us again of the Treasury Secretary John Connally’s statement at the G-10 meeting late 1971, “The dollar is our currency, but it’s your problem”.
Second, we have been witnessing higher commodity prices. For food and oil net importing countries like Egypt, this should be another nightmare that would feed inflationary pressures and take a heavy toll on imports bill. Yet, we can argue that not all global dynamic forces are in favor of such a strong and persistent surge in global commodity prices. The rebound in oil prices, for instance, is still standing on fragile supply drivers that are unlikely to persist, while demand still faces the challenging COVID-19 developments on the ground.
As a result of these developments, we expect the CBE to pause its easing cycle until H2 2021 to assess how Egypt’s good macroeconomic fundamentals will help dampen market reactions to U.S. yield shocks and the duration of the current surge in global commodity prices.
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