Rupee may face pressure this month

KARACHI: The rupee is expected to experience some volatility, trading within the range of 278 to 279 this month due to weak supplies, as there is limited dollar selling from exporters, alongside the strength of the dollar against other major currencies.

In the interbank market, the rupee closed at 278.62 per dollar on Monday and fell further to 278.72 on Wednesday. However, it recovered slightly and ended the week at 278.57 on Friday.

According to a weekly note from Tresmark, a financial markets terminal, the rupee weakened further, trading as low as 278.75 per dollar before regaining ground in the last two trading sessions.

“The range for this month is 278 to 279 with more volatility to be seen in swaps,” it said.

“Analysts expect premiums to go higher in coming weeks, despite cuts in the upcoming MPS [Monetary Policy Statement]. But these premiums may not be enough to attract exporters in larger numbers, as they see a downside for USDPKR very limited, with Rs1-3 premium (1-3 month) as too little incentive,” it added.

The State Bank of Pakistan (SBP) will announce its monetary policy decision on January 27, with analysts anticipating only a 100 basis point (bps) rate cut this time. This outcome could disappoint the market, as noted by Tresmark.

In December, the SBP reduced the policy rate by 200bps to 13 per cent, marking the fifth consecutive cut since June. This brings the total rate reductions for 2024 to 900bps.

The report indicates that sensing economic stability, the current government has adopted a more vocal and confident approach. Key officials, including the prime minister, finance minister and SBP governor, are highlighting their achievements and making optimistic forecasts. They believe that the International Monetary Fund (IMF) bailout will continue despite some slippages, and they expect remittances and exports to stabilise the economy, with remittances reaching a target of $35 billion during this fiscal year. The rupee is projected to remain stable, inflation is expected to average 12 per cent, and Pakistan aims for a GDP growth rate of 3.6 per cent.

“If political conditions do not deteriorate, we may well see a good, creative and growth-oriented budget in June this year,” it said.

“As seen over the last few decades, whenever growth starts gaining momentum, Pakistan falls prey to political chaos,” it added.

Regarding the US dollar, the report notes that the US Dollar Index rose by 0.5 per cent to reach 109.67, having earlier peaked at 109.91 -- the highest level since November 2022. The Euro and British Pound fell to 1.0244 and 1.221, respectively. Most analysts believe that the effects of the ‘Trump trade’ have already been priced in and that dollar strength may begin to wane.

The report concludes that the performance of the US economy will significantly impact the global economy, including Pakistan’s. The USD index is expected to remain above 105 for most of the year but may decline due to overvaluation pressures on exports and fiscal policies aimed at balancing trade and promoting economic growth.