Middle East FX & Egypt, June 17th 2025
FX Markets unwound the recent up moves ; oil erases the gains . Are markets too complacent ?
Welcome to MENA MARKET LAB !
We aim here to bring you regular updates on factors and events impacting financial markets in the Middle East and North Africa region with an accent on foreign exchange and rates.
We also aim to bring reflections on certain topics and subjects, close to recent events, which we think are worth stopping on .
Thank you for your attention !
Tehran ! Should have gone before !
Day 5 is in the exchange of hostilities between Israel and Iran !
Some observations : with the events, we got to discover the living rooms and studies of many Middle East intelligence and military consultants/specialists/experts. All commenting a bit far from the action but some are interesting even though it doesn’t in anyway preclude what is going to happen next, only Israel PM Mr Netanyahu and Iran’s Supreme Leader Ali Khameini might know.
One thing that is rarely mentioned or talked about is a similar operation that Israel undertook in June 1981 and codenamed Operation Babylon that saw a daring air force raid destroyed an unfinished nuclear reactor a short distance away from Baghdad. Irony at the time : in the 60’, it was France that helped Israel build its first reactor , it was also France who was building Iraq’s nuclear reactor a decade later. It was also the beginning of a new doctrine , Begin’s doctrine after the name of Israel PM of the time and aimed at preventing any other regional powers to acquire nuclear weapons.
Side effects of Israel’s attack, the Ukraine war is moving further away from the front page in the news reporting, giving free rein to Putin to intensify his war efforts. Another casualty is Sudan. Despite a humanitarian situation much worse than Gaza, it didn’t attract much attention before and certainly no demonstrations at all , so they are now completely off the radar. The world is attention deficit. This new conflict is also diverting attention from Gaza and the West Bank.
Back to our situation.
Oil started the week around 75 $ a barrel to drop now to 72 after seeing a spike to 78 last Friday ! Israel doesn’t seem for now interested in destroying Iran’s major oil and gas installations. Just as we can imagine that, unless pushed to the extreme , Iran will not attempt to disrupt oil traffic via the Strait of Hormuz. Keep in mind that China is a major buyer of Iranian oil . So oil is still a bit higher , still well below though the high’s of January 2025 above 80 and July 2024 above 87. But again, if we dropped from 75 to 70 in a few hours, we can easily go back if the headline is worth it !
OPEC 8 as we know has been and is gradually reducing the voluntary production cut that were installed in November 2023. Out of the 2.2mn bpd cut, they have increased by 1.2 mn bpd so far ( on the paper). And then , there is also 5 million barrels that had been cut from April 2022 and to early 2023 by the main group, OPEC+, that are not supposed to come back before 2026. So among OPEC members, there is extra capacity available and whereas with oil at 60 or 65, they were cringing a bit, at 75 $ we probably see a few smiles. Same for US shale oil producers .
But what is interesting is the desire of the market community to view the stories of Iranian feelers for talks as a sign that the worse is over. So Trump says “Iran would like to talk “. But in all honesty, Trump’s talks or super deals haven’t brought an end to the war in Gaza, nor in Ukraine. On the contrary. The previous JCPOA signed in 2015 took more than two years to negotiate and we would like to believe that a real estate baron can wrap it up in two months. Markets’ optimism might be misplaced.
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As we commented on Friday, GCC markets reacted early and fast but after a few fireworks, the “ party” fizzled. One had to be quick to take advantage of those spikes to cut positions – take profits.
Saudi riyal : as we noted few days ago, spot and forward prices started to move higher Thursday and accelerated on Friday but soon run into a brickwall : at the high, early Friday morning , 1 year FX was dealing 315/365 and spot at 3.7560 : now spot is 3.7525 offered and the 1 year 195/2025, below Thursday’s closing. Apparently those high levels on the Saudi curve are proving to be attractive for local interest !
Other GCC currencies also rose Friday with spreads widening but as with the riyal quickly fell back to even lower levels by today’s close. Just one exception with the Kuwaiti dinar but as we said several times , the dinar can have a life of its own !
So the market community , banks, traders, corporates, investors seem happy to take at face value reports indicating that Iran wants to talk ! It is something we have evidenced many times over the past few years : events or shocks that ought to cause a sharp market reaction are proving to be less and less potent ! Until..
Egypt’s markets also recovered rather well !
In this situation , Egypt is much more vulnerable than GCC countries : it doesn’t have the same buffers that they have : lots of oil and gas for most and very sizable SWF.
Egypt is fragile to all those shocks and there has been quite a few since 2020 : Covid, Ukraine’s special military operation , October 7th and now Iran-Israel.
Egypt’s energy situation is also preoccupying , President Sisi was calling on his government recently to do all the necessary to avoid energy outages this summer again. Ten days ago, we were writing that the government was making plans to buy 40 to 60 LNG tankers for the summer. A day before Israel started to attack Iran, a story was put out by Reuters that Egypt had reached an agreement with several energy companies and trading houses to buy between 150 and 160 LNG cargoes to the end of 2026. The price estimate was 8 bn $, guess it is a bit higher now !
To make matters worse, Israel has ordered a temporary shutdown of its biggest offshore gas field, the Leviathan and Karish fields. That has forced Egypt to halt fertilizer production due to the gas interruption . So yes Egypt is vulnerable to those external shocks. Not to mention a report saying that Trump wants to extend the travel ban to 36 other countries and that could include Egypt !
On the markets,
· Last Thursday, spot EGP rallied from 49.50 to 49.78 with a volume of 700 mn Sunday, more action with the spot rising by 1.6 % to a high of 50.80 and then eased to 50.62 , with this time 770mn $. Monday , the spot fell back down to 50.27.
· NDF, the curve pushed higher Friday with the 1 year closing at 59.75 and with trades above 60. Implied yields jumped markedly but part of it due to the fact that the local spot market was closed. Today, the NDF curve moved back down with the 1 year at 58.75 and the 3 month at 52.50 mid from 53.15 on Friday and it might well be that by the time I press the Send button, it might even be lower !
· Egypt’s main index dropped 4.6 % Sunday and was more or less flat yesterday.
· Auction wise, the 182 day had a good reception with yields a bit higher but the auction was last Thursday. At Sunday’s, the 91 day had a cover ratio of 2 with average yields of 28.619, up 73 bps from last one. The 273 and 364 day didn’t perform well.
· On the bond side, only the 3 and 5 year were on auction and the 3 year did fine with a cover ratio of 1 and yields up by 50 bps to 22.619 %.
· Secondary market, yields shot up Sunday to 29.75 % for the 3 month, 28.50 % for the 6 month and 28.35 % for the 9’s. Locals were trying to bid 30 % but it didn’t get there. Monday was a “ boring” session according to a local trader, no follow through from Sunday. Volumes dealt were small although it might show higher numbers tomorrow.
So again , quite surprising to see how everybody seems to be buying in the story that if “Iran wants to talk “ then there is a deal. Not so fast !
I think markets are too complacent : Israel PM Netanyahu hasn’t finished the job in Gaza as he says after over 600 days of war ; he will want the job to be finished with Iran, that won’t be done in a few days and he is not interested in diplomatic talks. Trump cannot be seen as a neutral and impartial arbiter in this . Netanyahu is dreaming when he thinks Iranians will go down the street and overthrow the regime just because he dropped a few bombs : if anything, recent history has taught us that such campaigns on the contrary solidify the population around its leaders against the foreign aggressor . Hitler didn’t bend the will of the Brits by bombarding London and other major cities ; the Allied in WW2 didn’t bend the will of the Germans after their night bombardments on many large cities, Hamburg, Dresdner ..
So lots of things can go wrong here .
I would rebuild some long forward positions on the GCC, mainly on Saudi, Oman, Bahrain, Kuwait .
As for Egypt, the correction on the NDF with the curve falling back opens the door to pick up some hedges for treasury bill positions.
Thank you
DC