Rupee likely to weaken further

KARACHI: Rupee would likely continue to trade under pressure next week on account of high demand for hard currency and diminished supply, while US dollar appreciation against the basket of major currencies would also weigh down the local unit.

The rupee saw two sessions of volatility and plunges this week fuelled by higher imports, spike in international commodity prices, and deteriorating current account balance. Traders did not hold their breath ahead of a closely-watched monetary policy meeting scheduled by the State Bank next week.

Domestic currency fell by 0.52 percent to 162.32 versus the greenback in the interbank market.

The financial markets were closed from July 20 to July 22 on account of Eid-ul-Azha holidays.

“We can see some demand pressure from importers in the coming sessions. They are expected to be active on the buying side as Temporary Economic Refinance Facility imports are materialising at a faster pace, and banks’ net open positions are short,” said a trader at one commercial bank.

“The widening current account deficit also put pressure on the rupee,” he added.

However, some traders believe the local unit would bounce back from losses and trade at 158-160 levels as soon as there was clarity on the Federal Reserve rate hike schedule. The recent Real Effective Exchange Rate (REER) reading of 99 for June also endorses this view.

Analysts see no justification for a sharp fall in the rupee’s value with a comfortable cushion of the foreign exchange reserves available, and the State Bank of Pakistan being in a position to keep the markets stable.

SBP’s reserves increased $845 million to reach $18 billion as of July 16, 2021.

“The central bank is looking ahead to domestic factors and watching global and regional currencies and (perhaps consciously) letting the rupee weaken,” said Tresmark, an application that tracks financial markets, in a note to its clients.

Major currencies like euro, British pound and Canadian dollar have weakened by about 4-6 percent from recent highs (around the same May end period). Regional currencies like Indian rupee, Thai baht and Malaysian ringgit have devalued by 3-7 percent, it said. In fact the Dollar Index has also strengthened by about 3.5 percent during the last two month and shows a strong correlation to rupee weakness, it added.

The US dollar is strengthening not only due to the Fed’s recent hawkish pivot, but also from a sharp spiral in coronavirus cases amid the spread of the Delta variant. The Fed last week indicated earlier than expected policy tightening.

Rising commodity prices and how taper actions of some central banks could impact the markets, have also given the dollar a boost. There is some uncertainty as to when the Fed will start raising interest rates, but analysts expect currencies to dip further, till any direction comes from the Fed.

Pakistan’s balance of trade position took a big turn in June, changing the surplus current account seen in 11 months of the last fiscal year into a deficit. The country’s current account deficit clocked in at $1.64 billion in June, taking FY2021 number to $1.86 billion. An above expected number for June is mainly owed to higher machinery, food and petroleum imports. The one off import of defence equipment worth $450-550 million was also made in June.