What to Expect on Currencies & Interest Rates
This Week:
• SBP Cuts Interest rates by 2%
• Rupee strengthens to close at 163.50
• SBP reduces Reserves Requirements to free up Banks’ liquidity
IMF’s approval to provide Pakistan with $1.4bn under RFS not only infused confidence in the market, but more importantly, paved the way for other multilateral inflows from WB & ADB to the tune of $2.5bn. Markets also got to know that Pakistan may be favoured by the G20 in waving/rescheduling loans to the tune of $12bn. Keeping this in mind, traders wondered how much further could the Rupee strengthen and how low can interest rates go.
Looking at yesterday’s price action in USDPKR, most traders agree that it was a Central Bank inspired intervention, and part of the 3 pronged action taken by SBP including the rate cut and reserve cut, and was timed to coincide with the IMF’s RFS facility - and therefore with their consent. Considering this, and also the fact that the Central Bank in capacity of regulator, would not want to see extreme moves in financial markets (as may be seen by their staggered rate cut), Rupee should consolidate around current levels before strengthening further, but may not go below 160/$.
However, SBP’s space to take measures may be constricted by how well Pakistan manages the stimulus measures. Analysts are of the view that since IMF’s nod will be required for any material action, they will be closely watching for transparency and effectiveness of transferring the relief to not only the large and small companies, but also to other essential constituents of the economic cycle including retailers, daily wagers and even the unemployed. While SBP is on the ball, MoF will need to play catch up to give IMF this assurance that the money is being spent well. And there is much to gain by having the Fund on board as a financial enabler.
Unfortunately, between lives and livelihood, there is very little Pakistan can do to control the pandemic, but by adopting timely and effective framework for economic stability, it can soften the blow on livelihood. This may also need better collaboration with other countries & agencies. If done right, one more rate cut of 1-2% within the next quarter is on the cards.
Global
Risk on mood dominated global markets, buoyed by relaxation of lock downs in major markets. Traders were also boosted by reports that Gilead’s drug Remdesivir could be effective in treating coronavirus cases. The company was careful to state that the data was anecdotal, but markets are hungry for any bit of positive news when it comes to the virus and this fuelled a furious rally in stocks, although FX markets were more muted.
If there’s one thing that’s certain in forex, it is that the dollar is king. The greenback traded higher against most of the major currencies despite another round of worrisome data. More than 5.2 million people filed for jobless claims benefits last week and housing starts fell by the largest amount in three decades. Ironically, the primary reason for the dollar’s strength is ongoing pessimism. The dollar rises on good news and bad because investors perceive the outlook for the rest of the world to be worse. This is one of the reasons why euro could slide further and test its 3 years lows.
Comdollar currencies were also hurt somewhat by the continued weakness in commodities. Oil slid to $18/bbl in overnight trade pushing USDCAD back above 1.4100 while gold broke below $1700/oz pressing on Aussie a bit.
https://live.tresmark.com/Home/NewsPopupFullView?pk_NewsID=1487306 
