ISLAMABAD: While we all secretly wish the Pakistani rupee to trade below 260/$, there are many reasons we stick to our forecasts of 285/$ being the short-term consolidation level.
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Swap Premiums
When Banks have to make forex import payments, they need to buy dollars from the interbank. If they are not allowed to buy, they reluctantly do a buy-sell swap, which is a buy now, sell later transaction. The buy now leg ensures that there is a dollar balance in their nostro account, whereas the sell later leg impacts the forward premiums. One month forward premium is now trading at negative 10 paisa, whereas the 2 & 3-month premiums are at 25 paisa & and 250 paisa respectively. Just last month 1, 2, and 3 months were trading at 460, 850 & 1,300 paisa respectively.
This collapse in premiums is ominous and demonstrates that dollar liquidity is scarce in the interbank market, while there is still a backlog of imports.
Forward premiums didn’t collapse only because of the Bank’s generating dollar liquidity, but exporters have sold (estimated) $1.5 bn in forwards, mainly from the textile & and rice industry. This also means some export proceeds, are already accounted for and will not fall in October.
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REER
As the Rupee strengthens, it adversely impacts REER. In our estimate, at 285/$, REER would be around 98. This is cutting it too close for the IMF to be comfortable
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Pakistan’s Exports
Exports usually dip in the last quarter of every year due to seasonal trends. An 8-10% cut in exports is expected. Additionally, exporters are reluctant to accept orders with the local currency under 290 citing the increased cost of doing business & and prices of raw materials.
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Negative Interest Rates
Investors won’t forget that they are still taking a negative carry on their Rupee deposits. Real interest rates are estimated to be negative 7-8% and are forecasted to remain negative for this quarter. This is a material disincentive to hold the local currency
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Reserves held with banks
Dollar deposits held with banks have consistently increased since June. Reserves in June were $4.7 bn versus $5.5 bn now. With a cheaper dollar, this could accelerate the dollar transition.
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GDP Growth
Pakistan’s projected GDP Growth is 3%. This number needs to increase significantly for Pakistan to have more forex depth & and liquidity. While essential fiscal and export-centric reforms are being discussed, it will take time to implement them in letter & and spirit.
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Importers stay out of the Market
Importers who are on the sidelines will spring into action as soon as they notice the Rupee trending to a halt. Expect a flurry of imports, that day Rupee stops gaining by the magical 1 Rupee each day.
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Afghanistan
On Thursday, Helmand province announced an unofficial ban on trading in Pak Rupees. There is a huge stash of wealth there stacked in PKR and this could snowball into a proper headache for Pakistan’s administrators.
Ominous October
Several of the greatest stock market crashes occurred in October, including ‘Black Tuesday’ and ‘Black Thursday’ in 1929, as well as ‘Black Monday’ in 1987, and the worst of the 2008 financial crisis meltdown was also witnessed this very month.
The 4 key things building up to volatile markets are:
– Inflation
– Rapid rise of US Rates
– Rising Oil
– Slowing Growth
To sum it up for the US market, the yield curve recently steepened by 50 bps, unemployment rate is up from 3.4% to 3.8%, personal savings rate up 3% to 4-5% YTD, and maybe most importantly, HY defaults are up 1.6% to 3.2%, credit card delinquencies are up by half, from 0.8% to 1.2%, while auto delinquencies are soaring, up 5.0% to 7.3%.”
The rise in long-term interest rates & and a looming recession in Europe has taken the dollar index to multi-month highs with Gold & and GBP being the immediate casualties.
The dollar index only took a break when Investors saw Hardline Republicans in the U.S. reject a bill proposed to temporarily fund the government, making it all but certain that federal agencies will partially shut down beginning Sunday.
