The Battle Is Visible. The Cycle Is Not

Tresmark: One of the most famous battles in Islamic history was the Battle of Hattin in 1187 led by Salahuddin. The Crusader army marched across one of the hottest, driest regions in the Middle East in July 1187. Saladin deliberately allowed them to move away from water sources. He then surrounded them, burned dry grass around them, and forced them to march thirsty under intense heat and smoke. The battle was lost before it even began.

In reality, Hattin was merely the culmination of years spent building alliances, consolidating power and preparing for the campaign. The battle was visible. The cycle that produced it was not.

Markets often behave the same way. They focus on the battle and ignore the campaign.

The same is true for interest rates. Japan took three decades to complete its rate cycle. The Fed’s inflation fight has lasted years. The ECB is still grappling with the same problem.

Yet in Pakistan, investors bought PIBs this week as if rates were about to fall off a cliff. 1 year PKRV fell from 12.84 to 11.87 following the MPS.

Perhaps the market is right. Perhaps an easing cycle is around the corner. But cycles rarely reverse overnight. In our view, dont expect anything for now. The path of rates in Pakistan may ultimately depend as much on the global rate cycle, particularly Fed, as on domestic inflation and other factors.

Who Lost the War?
While only history will judge who won the war, we already know who lost it. Oil.

At the peak of the conflict, prices struggled to move meaningfully higher. And the moment a truce was signalled, they folded sharply. Markets are often described as forward-looking, and oil lost this round to weaker demand, the transition to green and changing consumption patterns.

Since we are talking about cycles today, this signal is worth paying attention to.

The Fed’s hawkish tone
The biggest shift this week came not from the Fed’s decision, but from Fed Chair Warsh’s tone. Markets spent most of 2026 asking when the Fed would cut rates, but this week, they started asking when rates may rise again. While rates remained unchanged, policymakers are flagging persistent price pressures. The result is a stronger Dollar, weaker EUR, GBP and JPY, and other assets particularly Gold, and higher bond yields.

Since we are talking about cycles, this is another signal worth paying attention to. Markets may believe the inflation cycle is behind us. Central bankers are clearly less convinced.

The bigger story, however, is that markets and policymakers are seeing very different worlds. Investors are buying equities, oil is falling despite geopolitical tensions and risk appetite remains surprisingly strong. Central bankers, meanwhile, continue to worry about inflation, but only one of them can be right. At some point, we will know who blinked.

Currency Expectations
The market continues to focus on the Central Bank’s aggressive buy-sell activity in the swap market. Reading between the lines, the SBP appears to be trying to achieve three goals without weakening the Rupee.

First, it wants to close the fiscal year with reserves above $18bn. Second, it needs to arrange year-end external payments of roughly $800mn. Third, it remains committed to maintaining its swap book within the IMF’s target of a $1.5bn short position.

The consequence is that swap premiums may decline further, but only marginally. The Rupee, meanwhile, is likely to remain broadly stable.

So should exporters continue forward booking?

We believe they should. While premiums are significantly lower than they were a few weeks ago, the opportunity cost of not hedging now outweighs the benefit of waiting for marginally better levels. More importantly, a growing number of analysts are expecting a firmer Rupee in the coming quarter, with some projections placing USDPKR below 278/$

For exporters, that strengthens rather than weakens the case for maintaining forward cover.

The cycle may have changed for premiums. It has not necessarily changed for risk.

This week reminded us that markets are excellent at spotting turning points, but not necessarily at predicting whether they will last.

As always, the battle is visible. The cycle that produced it is not.