Rupee to weaken further

KARACHI: The rupee is seen declining further next week on the back of soft supplies amid increasing outflows, while the dollar’s strength against major currencies adds to the local unit’s weakness, traders said.

The rupee fell 0.40 percent against the dollar in the three trading sessions of this week, reflecting the build-up of demand pressure as the interbank market opened on Wednesday after five days’ holidays due to Eidul Azha.

Currency closed at 210.10 to the dollar on Wednesday. The depletion in the foreign exchange reserves, slowdown in post-Eid remittances from overseas Pakistanis, and the appreciation of the US currency globally pushed the domestic currency down. The rupee ended at 210.95 per dollar on Friday.

“We expect the rupee to remain under pressure in coming days due to increasing demand for the greenback from importers, and dried inflows,” said a foreign exchange trader.

Pakistan has reached a staff-level agreement with the International Monetary Fund, which would pave the way for the disbursement of $1.17 billion to the country, but it could not lift sentiment on the rupee. The agreement is subject to the IMF board approval. Since the beginning of this fiscal, the local unit has depreciated by 3.2 percent, mostly on the back of uncertainty over the IMF loan programme.

Additionally, traders have been seized on the notion that it would be approved by the IMF board in the mid of August. For traders, who were witnessing Pakistan struggling with a lack of dollar liquidity amid soaring outflows, this seems like an eternity.

The rupee has not benefited from an interest rate hike of even 125 basis points (bps). Last week, the State Bank of Pakistan raised its policy rate to 15 percent.

Dollar strength globally has not been good news. A 75bps hike by FED last month and an anticipated further 75bps hike this month has smothered everything and anything, said Tresmark in a client note.

“Political overtures have also been seen during the last few days. First China released the held-up $2.3 billion, then the US indicated a reset and a recalibration with the new Pakistan government, and last, the Saudi crown prince accepted an invitation to visit,” it said.

“This suggests that in spite of the economic challenges ahead, the flow of dollars or petrol products will remain intact. Some patchwork to plug the unmanageable CAD (current account deficit) has already started, but with such a volatile environment globally, options for Pakistan look very bleak,” it added. How they approach this in the coming few weeks would determine the long-term direction of the local currency, Tresmark noted.

For the short-term, analysts are relying on the real effective exchange rate metric, where the rupee is significantly undervalued, and therefore, they are of the view that the rupee will be stuck in the 206-214 range for the next few weeks.