In mid-October 2018, the interbank forex market was desperate for dollars – as desperate as it was in June 2013. The desperation was so high that those who held dollar liquidity in the interbank market were being paid, instead of being charged, to convert their dollar holding into PKR so they could earn higher interest rates in the money market. Flagging that trend, BR Research wrote that the market shouldn’t be expected to find stability over the ensuing 1-3 months. (See ‘Dollar desperation’ October 23, 2018).
PKR’s movement since then hasn’t been a surprise. It remained weak and depreciated further against the dollar, with the last few slips happening in the last 10-15 days. But what holds next for the currency.
Fundamentally, i.e. looking at things from the perspective of real effective exchange rate, there seems to be no reason for massive depreciation; sans a payment shock here and there – the emphasis is on shock in the sense of slight aftershocks rather than an earthquake itself. (See Stable REER – no need for massive depreciation, published April 4, 2018)
Similar sentiments are visible in the interbank market. The yawning gap between Kibor and implied rate which shows underlying dollar desperation is now over. As is visible in the graph, when the exchange rate was kept flat under ‘Daronomics’ between 2016 until October 2017, the sharp increase in the difference in the implied rate and Kibor had signalled that the PKR was increasingly under pressure (see encircled part of the graph).
Unlike mid-October immediate the pressure is off – at least for now - and therefore visible in the implied yield curve. In June 2013, when PML-N was negotiating a deal with the IMF, the USD was in short supply in the shorter tenure, but market expectations were better in the longer tenure. Hence is the implied yield curve (black solid line) begins from negative rate in 1-week tenure but fairly upward sloping over longer tenure. Similar trend was observed in mid-October 2018 (see yellow dotted line)
As of April 3, however, the situation has improved in the short term, which is why the implied rate is not negative in the shorter (1-week) period. This means that the current pressure in open market is also uncalled for and is artificially driven by punters who perhaps need to be shown some stick as did Ishaq Dar a few times in his tenure as the finance minister. That said, the market does not have a great outlook over the next 12-month horizon. Which means gradual (not likely sharp) depreciation may continue in the months ahead, until such time the signing of the IMF programme brings some clarity to the table.