ISLAMABAD: Rupee felt the heat last week loosing Rs.4 in 5 sessions. Since the forex market crackdown, export proceeds have decreased as a significant portion of exports are being offset against export forwards that were previously completed. Typically, USDPKR also gets volatile when IMF is visiting & this time round, it would seem that the Banks were not allowed to fund their nostros through buy sell swaps either, resulting in forward premiums coming up & importers paying a wider spread to process their payments amidst dearth of dollar liquidity. Forward premiums for 1, 2 & 3 months were last traded at 200, 300 & 600 paisa (significantly up from last week at 0, 0 & 90 paisa).
Importantly, the Rupee looks to consolidate at 285 for the coming week, with an occasional spike to 288/$, and with market expecting it to recover once the IMF gives Pakistan a clean chit.
Positive Developments
October exports reached a record $2.7 billion, the greatest amount so far this year. At the same time CPI receded materially from 31.4% to 26.9%, Which must be a very positive indication for decision-makers who repeatedly refrained from raising interest rates and who defied market expectations by driving up the value of the rupee. The fall in CPI expedited a fall in KIBOR which has come down from its peak of 24.46% on 13 Sep to 21.68% as of yesterday, as the market accepts that interest rates have peaked in the short to medium term.
PSX Going Strong
The equities markets have taken notice of this trend, as seen by the KSE Index’s rapid ascent to an all-time high of nearly 53k. The announcement of election dates and the success of the IMF’s first meeting with important GoP players gave confidence to equity traders in addition to the improving interest rate outlook. Now that the circular debt has seriously hampered many a prosperous firm in the index, they are searching for a solution.
Exporters Vary on Global Volatility
Exports may have dried up, but when speaking to a few top exporters of the country, they believe the trend could last longer than expected, threatened by exporters old nemesis – ‘Global volatility’. This factor comes in various shapes & forms, from the hugely tragic ongoing Palestine conflict, to it threatening to expand in to a regional conflict. Global volatility factors overarch in other areas like US Yields which escalated to a jaw dropping 5% (10 year paper), recession risks, deterioration of US China relations and political instability in our own back yard.
What’s more, markets are of the opinion that US yields could cross 7% if the US economy skirts a widely anticipated recession that Europe might not. The majority of asset classes, developing nations, and consumer spending might all suffer greatly from this.
USD Index takes a breather
Since the Federal Reserve decided to keep interest rates at their current levels for a second consecutive meeting, the US dollar has encountered some challenges. Fed Chair Powell reaffirmed that rate rises are still on the table in an attempt to seem aggressive. The markets don’t expect any further rate hikes, however, and if NFPs are weaker than expected, it would likely signal the end of the current tightening cycle. On the other hand, a robust non-farm payrolls data would reinforce the Federal Reserve’s position that rate rises are still on the table and probably result in significant gains for the US dollar.
