Rupee gains temporary reprieve, but long-term outlook unclear

KARACHI: The rupee is expected to remain steady until June, but traders are bracing for a potential weakening of the currency as the central bank is likely to consider cutting interest rates before the end of the current fiscal year.

In order to anticipate the rupee's trajectory, traders are monitoring the SBP's monetary policy decision.

Due to weak exports, remittance inflows, and import payments, the rupee faced downside pressure in the interbank market this week. On Monday, the rupee finished at 278.33 against the US dollar, and on Thursday, it hit 278.48. On Friday, though, it made gains and closed at 278.38.

The rupee is expected to stay steady until June, at which point traders expect pressure on the currency. If interest rates are cut, analysts predict that the rupee may somewhat weaken.

Tresmark provided reasons in a note for the rate cut's effects on the local currency, pointing out that despite Pakistan having repaid $1 billion in Eurobonds, the country's foreign exchange holdings remain steady.

This resulted from its substantial current account surplus, even if it had to borrow some dollars in short-term.

"Reserves will be increased by the final installment of the IMF's stand-by arrangement. The finance minister of the nation anticipates that reserves will approach $10 billion in June. At this time last year, the SBP's portion of reserves was approximately $4 billion," it said.

The liquidity position is not too bad. Even though there are still a few imports, this equation should be made easier because exporters are projected to sell dollars in the future. In order to increase its reserves, the SBP is still purchasing dollars from the interbank market and will keep doing so.

Real effective exchange rate reached 104, a sharp increase. Even though it's high, it's still not concerning, and as long as the liquidity situation is strong, nothing will go wrong.

All of this indicates superb FX health, but it is necessary to review this in a month because the strength of the dollar may cause other currencies to weaken and other currencies may need to follow suit. At 157/$, the yen has dropped to a 34-year low.