The recent Boeing debacle illustrates why prioritizing stability and safety over cash flows is crucial. Pakistan has partially alleviated its cash flow crisis, thanks to the IMF’s recent tranche, but navigating the upcoming election period will pose a challenge.
The first few days of the new year have seen numerous positives, such as robust remittances, prospects of a current account surplus, a commitment to privatization, and progress in tax reforms.
Market conditions have stabilized, with bond market price actions reflecting a reduction in interest rates, a rally in Eurobonds, and a stronger Rupee.
The upcoming developments in the next couple of months are uncertain, and this uncertainty may be reflected in Pakistan’s Credit Default Swaps (CDS), which, despite a decrease, remains among the highest globally.
Currency Outlook
As pointed out last week, the Rupee has strengthened, flirting around the 280/$ mark. This shift is primarily attributed to exporters engaging in significant forward selling of dollars.
This was further accelerated by stronger reserves and 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
Richard Kelly, a world-renowned author, has successfully established a connection in his book between the extent of global military conflict and a 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 to 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.
Such an inflationary surprise could act as a catalyst for a spike in 10-year US bonds, prompting a correction in overvalued stocks. Additionally, it may elevate the complexity for emerging markets and global trade dynamics.
US CPI
The US Consumer Price Index (CPI) recorded 3.4%, surpassing market expectations of 3.2%. This led to increased volatility in currencies and precious metals.
Concerns are rising in the market that the Federal Reserve (Fed) may not implement a substantial rate cut during the upcoming March monetary policy meeting.