The recent debacle about Boeing shows why you shouldn’t prioritize cash flows over stability & safety.
Pakistan has somewhat salvaged the cash flow crises, courtesy of IMF’s fresh tranche, but navigating around the election period will prove to be a challenge. There have lots of positives in the first few days of the new year including robust remittances, prospects of current account surplus, seriousness in privatization & tax reforms, etc.
Markets are calmer with price action in the bond markets reflecting a cut in interest rates, a rally in Eurobonds, and a stronger Rupee. But what happens in the next couple of months is anyone’s guess, some of which can be reflected in Pakistan’s CDS, which, though lower, is still amongst the most elevated in the world.
Currency Outlook
As pointed out last week, the Rupee strengthened – flirting around the 280/$ figure. The main driver was exporters selling dollars in forward in large volumes. This was further accelerated by stronger reserves and the IMF’s BoD approval. From the price action last week, analysts are of the view that the Central Bank is supporting the 280 level, and any time it trades below 280 may only be temporary. Even during the last period of Rupee consolidation, USDPKR stayed below 280 for only 12 days.
We expect Rupee to be anchored around the 280 level till before the elections with temporary outruns on both sides.
Global Conflicts Escalate
The world renowned Richard Kelly, in his book, had been able to build a relationship between the extent of global military conflict and the surge in commodity prices. There is a definite escalation of conflict with the opening of the Yemen front, spiking the threat level to global shipping traffic. Apart from freight rates, supply chains, and trade flows, the real macro risk from the Yemen quagmire is panic buying in crude despite its bearish fundamentals.
If Brent spikes above $100 as multiple wars in the Middle East escalate into a US, Israel, and Iran direct military confrontation, inflation risk will rise to at least 4% CPI, and the Fed will not cut interest rates any time soon. That would be a catalyst for a spike in 10 year US bonds and a correction in over valued stocks. It would also increase the complexity level for emerging markets and global trade.
US CPI
US CPI clocked 3.4% against market expectations of 3.2%, resulting in higher volatility amongst currencies & precious metals. The market now worries that the Federal Reserve (Fed) won’t deliver a first-rate cut at the March monetary policy meeting.
