JS Securities Limited - JS Research.

Karachi -- August 05, 2022 (PPI-OT)

Divergent views on Policy Rate starting to emerge

Pak Rupee is undergoing unprecedented volatility as macro headwinds and political noise rendered Jul-22 to be the worst month for PKR (-14%) since May 1972; followed by a chunky DoD appreciation of 4.2% (PKR9.65) seen on 3rd August.

Recovery in PKR, softening int'l oil prices and slowdown in select demand indicators have started creating divergence in policy rate expectations for MPS on 22nd Aug. Participants are also taking a cue from moves in PKRV to firm up their expectations.

We conducted a brief survey of money managers to gauge where the consensus was leaning between above factors and need to address CPI pressure which is expected to hover over 20% YoY for next few months. Our survey reveals 63% participants expect a hike between 50-200bp. More interestingly however 37% respondents now feel that SBP will opt for status quo.

We maintain our view of 150 bp hike. We believe need to address negative real rates will outweigh recent nascent positives.

Unprecedented volatility in Pak Rupee

Pak Rupee witnessed an unprecedented nosedive devaluing 14% during July-2022 (highest drop since May-1972) and 32% in the past one year. In addition to bleak macroeconomic indicators, it is understood that weaker sentiments due to political noise also had a part to play in this devaluation.

This was followed by a sharp rebound where PKR has recovered 5.4% in last two days, where it appreciated 4.2% (+PKR9.65 DoD) in one day alone, marking the largest DoD appreciation since Aug-1999. The revival in confidence so far has also been reflected in the equity markets (up 3.1%) and international bond markets (Dec-2022 bond YTM down by 21 ppt to 30%) in the last two days.

Beginning to create divergent views on policy rate

The nascent recovery in PKR and other macro and political developments have started creating divergence in policy rate expectations for MPS on 22nd August. Participants are also taking a cue from moves in PKRV to firm up their expectations. This is in contrast to the widespread view of further hikes being inevitable till a few weeks ago.

To gauge the quantum of changed expectations, we conducted a brief survey of money managers to assess where the consensus was leaning between above mentioned factors and need to address CPI pressure, as CPI is expected to hover over 20% YoY for next few months. Our survey reveals 63% participants expect a hike between 50-200bp...