Emerging market currencies: the dollar king brings bad news – Opinion


The money market did not accept Shaukat Tarin’s assurance regarding the IMF (International Monetary Fund) program this time – the rupee rose 1.38 points (0.78%) from Monday and Tuesday – all as he took the news of the Saudi loan, which pushed the rupee for eight consecutive trading days (October 27 to November 5), from 175.52 to 169.6 (3.25%). The bulls of the dollar were back in the market on Wednesday, withdrawing 0.79% more of the rupee as the government and the opposition clashed in the joint session of parliament.

And whether or not Shaukat Tarin risks becoming the financial adviser who shouted “deal” once too often, that’s a debate another time, since his guarantees on the EFF (Extended Fund Facility) are invariably more guesswork than facts, the fact remains that the rupee is ready for its next two big jumps when one, the Saudis actually send the money they promised and two, the additional tax room and the additional legislation demanded by the Funds give it the green light for the next installment.

There is no doubt that such developments will cause the local currency to rise, but they will do nothing to remedy the fundamental reasons for the weakness of the rupee, and they also make the simplistic assumption that the rupee and the dollar are trading in such a way. isolated. The local market has yet to realize, for some reason, that the dollar is also the world’s reserve currency and has a life far from the rupee as well. And in this lifetime, developments in the US and global financial markets once again strengthen his position as Planet Forex’s King of the Dollar.

The Dollar Index (DXY), which measures the value of the greenback against the six most actively traded currencies, reached levels not seen since July 2020 thanks to better-than-expected US retail sales figures (up 1.7% compared to expectations of 1.4%) and the highest inflation since 1990. That pushed bond yields up, understandably, with a 10-year Treasury yield rushing to 1, 65% and 30 years at 2.04% and prompting a hawkish tone from senior Federal Reserve officials.

St Louis Fed Chairman James Bullard told Bloomberg TV on Tuesday that the central bank is expected to “move in a more hawkish direction” during its next two meetings. And money markets are already factoring in a “high probability” of two rate hikes next year in June and November. This is bad news for emerging market currencies, as it means the King Dollar will remain firmly on its throne for much if not all of next year, pushing up commodity prices and putting more pressure on them. economies already struggling with high inflation.

This is even worse news for emerging markets which have been demoted to frontier markets and already have collapsing currencies and skyrocketing inflation. Hopefully, financial adviser Shaukat Tarin’s prediction about EFF will come true one of those times, as he clearly seems to like doing them without thinking too often about the realities on the ground, as this would limit the amount of losses the rupee suffers without. no reason. other than a completely unnecessary uncertainty.

After weeks of promising that a deal has been reached and will be announced shortly, he has now revealed that the IMF has demanded the completion of five “prior actions” before calling a meeting of its board to revive the policy. $ 6 billion facility. These include the removal of tax exemptions, the increase in energy tariffs and the SBP (amendment) bill. It is also said that he would no longer accept presidential orders as prior actions, meaning the bill will now have to be approved by parliament before a meeting can be called on the rest of the bailout program.

Surely that’s not what the market thought the financial adviser meant when he said a deal had been made. And while the Department of Finance tries to figure out this particular situation, as the current political temperature implies that nothing can go smoothly in Parliament, King Dollar will continue to beat the lives of emerging and border currencies.

The best thing the government can do for the currency and equity markets is to present the plain truth about the state of the bailout program and exactly when, and at what cost, its recovery can seriously be expected.

Copyright Business Recorder, 2021


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