Most of my readers are asking where is the Rupee headed & how to trade it. There is no doubt that USDPKR is headed below 280, but how low can it go & in what time frame?
Arguments for a stronger Rupee
1. The biggest clue is the mystery inflow in reserves. The fact that the reserves rose by about $1.2bn may not be as important as the source of these inflows. The inflow from untold sources indicates that Pakistan is still relevant in the global power lane. It also almost ensures that the IMF BoD will approve the upcoming tranche. And lastly, it also erodes the potential repercussions of whether elections will happen on time or not.
2. Post-IMF approval, inflows from multi-laterals will become bigger & quicker
3. Trade deficit has narrowed to $1.7bn, thereby raising expectations of another month of current account surplus. In addition to this, there is more inflow in SCRA related to PSX, indicating better liquidity levels
4. Pakistan’s major fight is against inflation. A stronger Rupee keeps price hike expectations checked. The government will want to continue this policy
5. SIFC Decides to Take Action Against Smugglers, Hoarders And Market Manipulators. This, too, will keep a lid on price pressures & inflation
6. Secondary market bond yields have declined, indicating potential interest rate cuts by March ’24 amidst expectations that inflation will come down.
7. If inflation trends lower in Jan, REER will be more or less contained
8. Pakistan’s CDS is consolidating to pre crises levels, and Euro bonds have rallied
9. 9. Last week, we saw increased activity by Exporters to sell dollars forward, mostly within the 60-day window, indicating the market view of Rupee stabilisation.
10. Lastly, the Fed’s indication of cutting rates has mitigated liquidity & funding concerns of Emerging Markets.
The one big risk to Rupee is the increasingly turbulent Gaza conflict. Israel has suddenly raised the geopolitical stakes in the Middle East with the targeted assassination of Hamas’s de facto ambassador to Hezbollah, followed by twin suicide attacks on the funeral. Taking turns, Iran has now vowed to take revenge.
Conclusion: Exporter concerns will cap the Rupee rally. We see the Rupee to test its highs of 277/$ before the end of this month.
US NFP data out
The U.S. added 216,000 jobs in December. The growth surpassed the forecasts of many economists and exceeded November’s revised gain of 173,000. Nonfarm payrolls rose by 2.7 million for all of 2023, with an average monthly gain of 225k jobs, much higher than the median expectation of 173k
This has increased the uncertainty about what awaits in the year ahead, but there’s still a growing consensus building that the Federal Reserve will start cutting interest rates as soon as March this year.
Next week’s consumer inflation report for December (Jan. 11) may clarify expectations.
The dollar’s weakness comes after a strong start to the year as high expectations for a significant dovish shift by the Federal Reserve eased. Investors have been a little more doubtful so far this week about whether the potential rate cuts will match the market’s high expectations. The market anticipates up to 160 basis points in cuts this year, double the Fed’s projection. Some investors feel that the market may be overestimating the rate cuts and was thus reversing their trades or taking profit on long-risk positions.
