The Risk Has Changed. So Has Our Positioning.

Tresmark: Caliph Umar was once travelling towards Syria when news reached him that a plague had broken out. After consulting his companions, he decided to turn back.

When asked whether he was fleeing from the decree of Allah, his response became etched in history: “We flee from the decree of Allah to the decree of Allah.”

He could do nothing about the plague, but he could decide how to respond to it.

SBP faces a similar problem

SBP meets on Monday with the domestic picture looking remarkably comfortable. Rupee is gaining, reserves have consolidated admirably, sovereign ratings have improved and domestic inflation, though elevated, is not alarming enough on its own to demand higher rates. Yet global markets are going awry. Brent is above $105, the ECB has just raised rates by 25bps, global bond yields have surged and US inflation remains elevated around the 3.4% mark.

None of these problems started in Pakistan, but SBP may increasingly have to respond to them.

Pakistan’s interest-rate outlook may no longer be about Pakistan’s inflation. It may be about everybody else’s inflation problems.

1. Status Quo Is Still the Best Case
Two weeks ago, we stated that status quo was probably the best-case scenario for the September MPC. We still think it is.

Bloomberg Economics and BMI, have now moved to a similar view, expecting no change on Monday but growing upward pressure on rates going forward.

A poll conducted by Tresmark on Wednesday showed 20% of institutional traders expecting a 50bps rate hike in Monday’s MPC. That number is likely to look very different after the last two days.

2. The Problem Is Being Imported
Over the last two days, the pressure has increasingly come from outside. Brent has crossed $105 as Hormuz remains under pressure and the Houthis threaten another critical shipping route around Bab al-Mandab.

The ECB has already responded to the energy shock with a 25bp hike, while elevated US inflation has pushed expectations of a Fed hike next week from just 58% to about 90%.

Pakistan’s domestic picture may be improving, but global rates are moving the other way.

3. The Bond Market Is Sending the Warning
The clearest warning is coming from bonds. The US 10-year came within touching distance of 5% this week, while the 30-year is at its highest in over two decades. Yields have also climbed sharply across Europe and Japan. In fact, Japan’s 10-year bond yield touched 3% this week for the first time since 1996, with the BOJ now widely expected to raise rates again next week. The Yen has also strengthened remarkably, trading around the 153 level.

Central banks can decide what happens to overnight rates, but markets, especially the long end, are increasingly deciding how expensive money really is.

ALERT: Change in Forward Positioning
For the first time in this cycle, Tresmark is changing its forward positioning.
Previous: Sell USD forwards 4–6 months
Now: Sell USD forwards 3 months or less

There is little change in our underlying direction on USDPKR. However, rising geopolitical stress in the region, particularly its impact on oil, has changed the risk-reward of staying further out on the curve.

For now, we prefer to shorten tenor rather than change direction. We will continue monitoring the situation closely and update our positioning if conditions change further.