KARACHI: The FX market breathed a sigh of relief as the Goldilocks zone (275-285) remained intact. USDPKR rebounded from 275 levels to rise to 282 on public sector related imports; though the real reason could be to break the monotony of a-Rupee-a-day rise. The rupee closed the week at 278.80 but looks set to remain range-bound until at least the next IMF tranche is completed. At the same time, there will be fluctuations during the upcoming monetary policy on October 30. In the last T-bill auction, cut offs were reduced by 30-45 bps for 3, 6 and 12 month securities and the rate cut could put some pressure on the rupee.
What can we learn from Turkey?
After the election, Erdogan changed his economic policy. This meant a meteoric rise in interest rates from 8.50% to 30% in just 4 months (did someone say catastrophic?). It also sent the lira down more than 25% during that time (most recently at 27.80/$). After all that, inflation is still over 60% and out of control! This could have happened to Pakistan too… but thank god we took the ‘red pill’.
Rise & Shine in black gold
ME (Middle East) geopolitics is getting deadlier by the day as Israel unleashed its ground attack. This tragedy could not have come at a worse time for the global oil market with the onset of winter, an increase in demand above 100 MBD, a drop in Russian tanker supplies, a peak in US shale oil production and a fateful decision by Saudi Arabia. reduce production by 3 MBD below its free capacity. The market is clearly underperforming and the first signs of panic buying are emerging. Brent broke above $90 last week and looks set to break above $100 soon. This is ominous for the great fight against inflation
Battle of Waterloo
Like Napoleon, who was confident going into the Battle of Waterloo but was defeated and exiled, the Fed remains confident of its eventual success against inflation. And while the Fed clearly waged its war, it accomplished its Waterloo.
The US national debt is now over $33 trillion and growing. In addition, the US is now expected to help Israel – and will continue to help Ukraine, in a period of mounting fiscal problems.
Despite rising tensions in Gaza and a quick flight to safety, US 10-year notes were sold off aggressively, with the US 10-year yield hitting the 5% mark after rising around 35 basis points since Monday. The sell-off can be explained by strong retail sales data – which followed a strong NFP reading and stronger-than-expected inflation data from the start of the month – both of which further supported hawkish Fed expectations. Until then, the mysterious inflation box still needs to be deciphered.
The battle for inflation
But it’s not just Turkey and the US waging a war on inflation. Inflation in Pakistan is consistently above 30%. Last week, petrol prices were reduced by a massive Rs. 40 and this will soon be reflected in subsequent inflation readings. However, this reduction in fuel prices could not be possible with the ever-decreasing rupee. The latest weekly SPI also shows a small reversal and may be just the little the government needs to start cutting interest rates.
Looking at the fact that if inflation reverses due to the ‘Stronger for Longer’ rupee policy, we can see that the Goldilocks zone will be put to the test. If the IMF tranche moves forward successfully (early next month), we may see the rupee heading towards 270 by mid-November and may even see a 100-200 bps rate cut by the end of this year.
Real gold
Typically, one would expect gold to weaken if interest rates rise above 5%, but gold didn’t do the normal thing and jumped above $1,980. A steeper yield curve under deflationary pressure suggests that markets are “risk-off” and seek liquidity in short-term cash equivalents over speculation in long-term debt instruments. Gold is favored over risk assets such as stocks and commodities because its monetary aspects come into play as a safe haven. The fragile geopolitical status in the world ensures that gold will continue to buy.
