Rupee seen struggling against USD next week

KARACHI: Rupee might retreat a bit against US dollar (USD) next week as the latter was likely to remain in high demand owing to imminent import payments, traders said.

The local unit ended near a record low of 168.02 per dollar in the interbank market on Friday. It hit an all-time low of 168.43 on August 26, 2020. The domestic currency closed at 167.23 to the dollar on Monday.

“The rupee should move within 168-168.40 range with chances of losing some ground if any big demand for import payments emerges,” one commercial bank trader said.

There is a reason for the rupee to be little moved as traders await the monetary policy announcement due to be made on September 20. “We think most players will be cautious ahead of the central bank’s monetary policy decision and wait to see what stance State Bank of Pakistan will take on interest rates before taking big positions,” said a trader. The SBP is likely to keep the policy rate unchanged at 7 percent in the upcoming policy review, but traders are concerned about the weakening of the local currency and rising inflationary pressures. If the SBP’s Monetary Policy Committee takes these two factors into consideration, it can raise the policy rate sooner rather than later.

In ordinary circumstances, the situation for a rate increase would have been reasonable like rising inflation, weakening currency, and a burgeoning fiscal deficit. However, there are many reasons why a hike looks unlikely.

With Covid related economic distress, an accommodative policy is being used by most countries, and the resurgence of the Covid case, both globally as well as domestically means continued support would be crucial to the already meager GDP growth forecasted.

In addition, Fed seems to have resigned from any earlier than expected tightening, based on worse than expected macroeconomic numbers. This will be persuasive enough to keep a lid on any tightening here and be convincing for multilateral agencies, including the International Monetary Fund (IMF) to not bring this up. In terms of addressing inflation, most analysts agree that inflation is more an administrative failure rather than a typical demand-led trend. “While the currency has weakened substantially, there are no distress factors. Reserves are adequate. CAD [current account deficit], though significant, is still manageable. And access to external funding (through IMF and other sources) is intact,” said Tresmark that tracks financial markets in a weekly report. Remittances from overseas Pakistani workers rose 26 percent year-on-year to $2.66 billion in August. These inflows increased 10 percent to $5.36 billion in the first two months of the current fiscal year.

Traders expect the currency to stabilise around Rs168.50 level, whereas, leaving the currency undefended would pose much bigger headaches for the economic team, it added.

Although the SBP in its previous monetary policy had stated that interest rates could be adjusted higher to counter inflation, analysts are of the view a rate hike is still far off for at least the remainder of the year.