The currency is under pressure for the past few days. There are some traditional payments pressure due in June. The world commodities are moving high, and general economic activities are picking up – both factors are contributing to higher imports. Exporters sold earlier in the forward and now they are waiting. The contracts are being squared on earlier forward sales. And market reacted to REER crossing 100 levels. It is a temporary blip and remittances flows would be better near bakra Eid. These factors will enhance the supply in the market. However, September onwards, the pressure on imports will increase due to TERF related machinery import. Overall, the PKR/USD is likely to remain in the band of +/- 2-3 percent of 155.
Pakistan’s currency is now market-based where SBP interventions will be there to the extent of curbing the volatility in the market. The direction and levels will be determined by fundamentals – supply and demand, and REER. Based on all these factors, there is no reason for the currency to move substantially either way from the current level.
Here’s a little run-down of what happened. This pressure on currency was expected during June. With currency heading south, exporters stopped selling in the forward market. Exporters have a herd mentality. They usually sell in forward when the PKR is strengthening and wait for better levels when it is weakening. During Feb and March, PKR/USD was appreciating – moving from 160.2 on 1st Feb and peaking at 152.8 on 31st March.
In Jan, exporters were of the view that the PKR/USD will remain 160 plus, and they were waiting for the right time to sell. But due to better remittance flows, the currency was moving in the other direction. Seeing that, exporters jumped on the band wagon and started booking in forward in anticipation of further currency appreciation. Their selling flooded the market with liquidity and currency appreciation continued.
Market was expecting interest rates to move also seeing that currency was looking strong, However, the international commodities prices started moving up fast. The new FM-in-making gave some statement that interest rates should be low, and currency should be between 155-160. Seeing this, the market’s behavior changed. Bond yields came down and currency appreciation halted. In April and the first three weeks of May, the market hovered around 153.
The international oil prices started moving north to high 60s in the third and fourth week of May and that triggered some pressure on PKR. The remittances flows were relatively less during May due to seasonal post-Eid lull. There was lockdown for one complete week and that had hampered exports as well. All these factors started pushing pressure on PKR and it reached 154.4 on 31st May.
Then came the REER numbers of April at 103.3. And oil prices crossed $70/barrel. These coupled with higher payment pressures in June moved the market up and PKR/USD reached 155.7 yesterday. The supply from exporters is short as the inflows are coming but these are squared against their forward contracts made earlier. Exporters are not doing forward anymore as they are waiting for higher levels.
The dollar liquidity is tight and is likely to remain tight for the next few days. The remittances will pick up close to Eid and that may reverse the direction and exporters may come to sell in forward again. Thus, the downside of PKR from current level is limited. And appreciation around Eid would be curtailed by higher TERF related imports to sync in. In a nutshell, in the next few months currency will remain +/- 2-3 percent of 155.
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