Market analysts are closely monitoring the Pakistani rupee’s performance as it faces mounting pressures in the coming week. The surge in demand for US dollars, stemming from the clearance of import backlogs and impending dividend payments, is expected to weigh heavily on the currency, according to insights shared by traders (as reported by The News).
Furthermore, concerns regarding the potential longevity of the interim caretaker government and doubts about this year’s scheduled elections are casting a shadow over the rupee’s prospects.
In the interbank market, the rupee has already experienced a 1.46% depreciation against the US dollar this week. Its initial value of 291.51 on Monday declined further to 295.78 by the end of the trading week on Friday.
A foreign exchange trader elaborated on the situation, stating, “The rupee is poised to continue its downward trajectory in the coming days due to heightened demand for the dollar, driven by the release of delayed import payments and dividends.”
This demand surge follows the easing of import restrictions in line with International Monetary Fund (IMF) requirements. A backlog of payments had accumulated prior to the IMF’s standby arrangement due to insufficient foreign exchange reserves, the trader added.
It’s worth noting that the market operates solely on the principles of supply and demand, with no central bank intervention, as emphasized by the trader.
The State Bank of Pakistan reaffirmed in its July monetary policy statement that the “market-determined exchange rate will continue to serve as the first line of defense against external shocks and support reserve build-up.”
Nonetheless, Pakistan’s current account balance shifted from a four-month surplus to a deficit of $809 million in July, primarily driven by increased imports.
As of August 11, the foreign exchange reserves held by the State Bank of Pakistan saw a modest increase, rising by $12 million to reach $8.05 billion.
Market sentiment is preparing for the rupee to potentially breach the historic milestone of 300 per US dollar, as noted by Tresmark in a client advisory.
“While this seems to be the consensus in the market,” the firm stated, “we believe there is a tangible possibility of an ad hoc interest rate increase, which could alleviate some of the rupee’s pressure. Essentially, we anticipate the rupee to trade below the 300 mark in the upcoming week.”
“Our assessment also considers the rise in currency swaps, indicating healthy liquidity levels, as well as meticulous import management. It is premised on the notion that a weaker rupee could exacerbate inflation concerns.”
A quick review of the performance of the last five interim governments reveals a consistent depreciation of the local currency, averaging approximately 6%, according to Tresmark. Additionally, the rupee has historically depreciated in the first three months following the election of a new government, averaging around 3%.
“Interestingly,” the firm pointed out, “during interim government phases, interest rates typically saw an average increase of 80 basis points, whereas they remained relatively stable in the first three months of elected governments.”