Fed, Gold & Rupee

Tresmark: Last week we spoke about 3 key trades:

Dollar Forward Booking

This trade looks intact. Premiums have consolidated and the favoured tenors remain around 4 to 6 months. In fact, the Rupee looks so stable at the moment that foreign investors are gradually increasing their bond portfolios.

Foreign investors purchased around $171 million of bonds in the first 50 days of FY27. With yields around a nominal 11–12%, the trade only really makes sense if they expect the Rupee to remain relatively range-bound. Moody’s upgrade could strengthen that trade further by reducing the perceived risk of holding Pakistani debt.

No Change in Upcoming MPS

We also spoke about our expectation that rates will remain unchanged at the upcoming MPS on 14th September. This view has strengthened further, with the consensus inflation forecast for August now upgraded to 10.50%.

In fact, after Fed Chair Warsh’s talk at Jackson Hole, a status quo may actually be the best-case scenario. Read that again. He said underlying inflation trends in the US had not “meaningfully improved” and reasserted that the central bank’s focus should remain on delivering price stability. This pushed the probability of a 25bps September rate hike from around 35% to 55–60%.

SBP also injected a massive Rs12 trillion through 7/14-day OMOs. While these injections are routine, the unusually large size raises a crucial question: How tight is monetary policy really if the banking system requires huge liquidity to sustain it?

Gold is no longer just fighting the Fed. It is fighting the bond market

We also spoke about taking profit in Gold around the $4,700 level. The longer-term bullish framework remains intact, but in the short term, Gold may need to digest the growing probability of a Fed hike.
Gold and Bitcoin are both showing stronger technical setups, but in the short term there is simply too much going on. If 30-year yields push back toward 5.30%, the market stops hearing “hawkish Fed” and starts hearing something less comfortable: duration stress, fiscal risk and a rising cost of capital. Higher yields are no longer simply Dollar carry candy. They become a warning light.

The growing friction between the Fed and Treasury is another flashpoint. Scott Bessent’s Treasury is buying long-dated bonds to contain yields, effectively loosening financial conditions at a time when inflation may require the opposite.

Then there is Japan. Rising Japanese yields matter because Japan remains one of the world’s largest holders of US Treasuries. Washington’s intervention to support the Yen shows how closely the two markets are connected. Turmoil in Tokyo can quickly become higher borrowing costs in Washington.

Euro May Have a Problem
While analysts remain bullish on the Euro, cracks are emerging. France is becoming a bigger problem than the ECB, with its 10-year bonds now yielding more than Italy’s as markets worry about a large fiscal deficit, debt above 116% of GDP and growing political uncertainty.

The September rate decision may determine whether the Euro’s rally can continue.

Oil Is Looking Past Hormuz

Oil fell around $5 this week despite the continued closure of Hormuz. The market appears increasingly convinced that lost supply will eventually be replaced, whether through a reopening of Hormuz, Venezuelan barrels or simply weaker demand.