Rupee Likely to Stay Resilient Amid Year-End Dollar Demand

Rupee Likely to Stay Resilient Amid Year-End Dollar Demand

The Pakistani rupee is expected to remain resilient against the US dollar in the upcoming week starting June 24, 2024, despite higher demand for dollars due to import and corporate payments.

According to a report from financial terminal Tresmark, the rupee may face pressure due to fiscal-year-end dollar demand from importers, but it is unlikely to surpass the 280 per dollar level.

The report, released on Saturday, highlighted that the rupee fluctuated within narrow bands in the interbank market during a holiday-shortened trading week. The local unit ended Thursday at 278.60 against the dollar, gaining little ground to close Friday at 278.51. Markets were closed Monday through Wednesday for public holidays in observance of Eidul Azha.

Despite the shortened week, three significant events occurred. Firstly, the KSE-100 briefly crossed the 80,000 level on Friday. Secondly, the real effective exchange rate in May was 100.7, down from 104.4 in April. Lastly, after three months of surpluses, Pakistan posted a $270 million current account gap, as record remittances were received but the current account balance turned negative. Analysts predict a significantly higher current account deficit in June.

Tresmark indicated that while the rupee remained range-bound, it is expected to come under pressure next week due to substantial payments related to the fiscal year-end. The deterioration in the current account deficit, a slowdown in reserves, and expectations for further rate cuts are all factors likely to adversely affect the rupee.

With other Asian currencies under pressure, the rupee is predicted to be similarly affected. On Thursday, the Indian rupee hit a record low of 83.62 against the dollar. Despite this, the report anticipates rupee weakness but considers it unlikely that the rupee will breach the 280 per dollar level.

Traders expect the central bank to continue intervening against any sharp moves in the rupee. The rupee may also receive further support from special convertible rupee account (SCRA) inflows in both T-Bills and equities, provided there is no political fallout.

The report also mentioned that dollar-rupee forward premiums increased slightly, with the one-month implied yield rising 260 basis points (bps) and the three-month swaps rising 144 bps after US bond yields declined. This decline was in response to economic data that raised expectations of two rate cuts by the Federal Reserve this year.

However, the market appears to be underestimating the political conflicts surrounding budget approval, which have significant potential to disrupt the economy. The budget, lacking support across the board, has been criticized, and there are reports of behind-the-scenes changes that are not publicly known.

If the budget is approved in a form materially different from the original, it could jeopardize the relationship with the International Monetary Fund (IMF). Some of the most challenging times for Pakistan’s economy have occurred during negotiations with the IMF, according to the report.

In conclusion, while the rupee is likely to face some pressure due to fiscal-year-end dollar demand from importers, it is expected to remain resilient and not breach the 280 per dollar level. The central bank’s interventions and SCRA inflows are likely to provide support, although political uncertainties surrounding budget approval pose a potential risk.