Weekly currency update: Expected continuation of rupee free fall
Despite IMF inflows, traders predict that the Pakistani rupee will continue to slide against the dollar in the interbank market the next week because of weak central bank action and the absence of a clear plan to revive the economy.
The local unit, according to the statistics, closed at 219.86 on Monday but dropped further to settle at 228.18 on Friday.Foreign exchange trader: “Investor uncertainty has been fueled by the sharp decline of the Pakistani rupee of more than 4% in the last six trading sessions,” adding that “Emerging currencies have suffered a lot due to the appreciation of the US dollar against the major currencies following relentless Federal Reserve rate hikes and increased safe-haven demand.”
Investors are concerned about the velocity of the local currency’s decline and the limited intervention, the trader continued.The rupee’s sudden drop from 210 to 230 in the month of July was caused by the dollar liquidity crisis and uncertainties surrounding the restart of the IMF programme.
This raises the question of whether a strategy is even in place, even though there ought to be one given that a weaker rupee will have disastrous impacts on growth, productivity, business sentiment, inflation, and fiscal space. According to a client note from Tresmark, a reputable web-based platform for treasury markets, there doesn’t appear to be any specific economic plan beyond involvement with the IMF, The News stated.
Losses in the open market are being tracked by the interbank market. The temporary ban on imports has caused the issue to move to the smuggling of goods out of Afghanistan for cash payments in dollars, which has raised demand for dollars on the open market. Other incidental reasons include the need for travellers to Dubai to carry cash in foreign currencies, the declaration of dollars by arriving passengers, and serious accessibility problems for withdrawing money in some provinces.
Foreign currency accounts (FCY) are enticed to withdraw US dollars and sell them on the open market due to the disparity between the Interbank and open markets. In contrast, the Tresmark paper claims that the FCY accounts’ extremely low interest rate isn’t doing much to draw in new deposits.
Numerous prospects for inflows from friendly nations, bilateral organisations, and sovereigns are seen by analysts (in the shape of flood aid). Additionally, there is a good chance that the IMF mission will be expanded by around $2.5 billion. However, the European energy crisis will put the world’s financial markets to the test.
The price caps in the European Union will result in stretched fiscal deficits, which would need floating additional bonds at higher rates to draw investors.”As a result, all assets in emerging markets will be severely strained, and the value of their currencies will continue to decline. In light of this, it would be wise to develop a funding strategy as soon as possible because external financing will fast become difficult to secure,” it stated. “Taking into account the foregoing, traders should square their positions when they arise,” it continued. “However, USD/PKR may most likely experience some reversal in the coming week to the fair value bracket of 222-226/$.”
