The US dollar slipped lower versus the Pakistani rupee for a second consecutive week. The US dollar Pakistani rupee exchange rate started the previous week at 155.60. That Monday the dollar strengthened, and the pair spiked to a high of 157.25 before falling lower across the week. The weekly low was struck on Friday at 149.7. The US dollar closed the week 0.5% weaker versus the Pakistani rupee at 154.60.
The US dollar was broadly out of favour against its peers in the previous week. Let’s take a look at the factors that moved the US dollar Pakistani rupee across the week.
US Dollar
A Dovish Fed
Mid-week, the Federal Reserve gave their monetary policy announcement. As was widely expected the Federal Reserve kept interest rates unchanged at 0.75%. After three interest rate cuts across 2019 the Fed considers that it has taken sufficient action to shore up the US economy.
In the press conference following the announcement, Federal Reserve Chair Jerome Powell signalled that policy was on hold and that the central bank had no intention of moving off the side lines unless there is a surprise change in the outlook for the US economy.
Federal Reserve Chair Powell also made it clear that the Fed would not consider hiking interest rates unless there was a significant and persistent increase in inflation, which has remained stubbornly below the Fed’s 2% target.
Market participants were disappointed by Jeremy Powell’s comments, especially given the resilience of the US labour market and the recent uptick in inflation. Investors understood Federal Reserve Chair Powell’s comments to be dovish, meaning that the Fed is leaning more towards easing monetary policy over a tightening policy. In other words, investors believe the Federal Reserve is more likely to cut interest rates as the next move rather than raise them.
The more dovish than expected Fed weighed on the value of the dollar. This s because lower interest rates don’t attract the same level of foreign investment as higher rates, therefore demand for the dollar is weaker.
Ultimately the outcome of US — China trade talks could influence the Fed. The central bank could quickly return to tightening bias if the developments in the US — China trade talks serve to boost the US economy. Improvement in the outlook for trade could result in growth picking up quickly and the Fed switching towards a more hawkish stance.
Economic Data
Retail Sales
UK retail sales figures also dragged on demand for the greenback. Data showed that US consumers cut back on discretionary spending at the start of the crucial holiday shopping season. US retail sales rose 0.2% in November month on month, well short of analysts’ expectations of a 0.5% increase. The weak data signals that consumer spending, which is a key driver of economic growth may have cooled by more than originally expected in the final quarter of 2019. The weak retail sales are in contrast to the upbeat labour market and manufacturing data released earlier in the month.
Trade Deal
After years of wrangling, the US and China have finally agreed a phase one trade deal. The deal involves the US reducing tariffs on $120 billion of Chinese imports to 7.5%. As part of the limited deal, the US will maintain 25% tariffs on around $250 billion worth of Chinese imports. In exchange China will make substantial additional purchases of US goods and services across the coming years, particularly agricultural goods, although no exact figures were mentioned. The deal also addresses intellectual property, technology transfer, currency and foreign exchange.
Analysts said that the deal was short on details and the tariff rollback was smaller than what had been expected and there is some scepticism over whether China would deliver on certain agreements. That said the deal boosted sentiment on Friday, lifting the US stock market to fresh all-time highs. As risk sentiment lifted investors sold out of the safe haven US dollar and flows increased into riskier currencies such as the Pakistani Rupee.
Week Ahead
This could be the beginning of the end of the trade war so risk sentiment could continue to improve potentially weighing on demand for the safe haven US dollar. However, it is also worth noting that the end of the trade dispute could be good news for the US economy and encourage the Fed to adopt a more hawkish stance. However, this won’t show up in US data this week. PMI figures, industrial production continuing claims and jobless claims are all due for release across the coming week.
Pakistani Rupee
The Pakistani Rupee has regained over 5% of its vale versus the US dollar over the past 6 months. The Pakistani Rupee strengthened to close at 154.6 on Friday after hitting an all time low close of 164.05 on the inter- bank market in June this year.
The rupee has managed to recover over the past six months owing to a significant increase in dollar supply in the market owing to a decrease in imports and an increase in exports. Loan tranches received from lenders such as the International Monetary Fund (IMF) and the Asian Development Bank (ADB) have also played a role in strengthening the rupee versus the US dollar.
Furthermore, the return of foreign investors to the stock market and increased foreign investment in government debt and in a range of sectors such as oil and gas, power and agriculture have also served to lift the Pakistani rupee versus the US dollar.
Earlier this month Moody’s Investor Service raised Pakistan’s credit rating outlook to stable from negative. The ratings agency cited the IMF programme as helping to stabilise the country. There is little doubt that investor confidence is improving.
Pakistan’s benchmark KSE — 100 has surged over 40% since a low in August. According to Bloomberg this rally makes index the top performer globally.
Week Ahead
Improved sentiment following the US — China phase one trade deal could offer support to the riskier Pakistani rupee. There is very little on the Pakistani economic calendar this week, the balance of trade for November will be released tomorrow.
