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The appreciation of PKR against USD has continued for the past few weeks (since the start of Feb 21). Prior to that (from 2nd Dec 2020 onwards), the PKR/USD was hovering around 160-161 level. It broke the phycological barrier of Rs 160 on 4th Feb when the parity closed at 159.99. Thereafter, it has been a steep fall. The market behavior is technical, and players (especially exporters) see the nominal rates before making future calls.

In Feb21, the market movement was slow, but the direction was of PKR appreciation. Interestingly, the market interest rates were moving up at the same time – both in the secondary market and cut off yields in primary auctions. Inflationary pressures are persisting. Global commodity prices are not in Pakistan’s favour. IMF is coming back. Yet, the currency appreciation continues. The reason is better inflows and the SBP allowing the market to find its own direction.

In mid Feb, exporters were betting on currency depreciation, and a few were making deals with162-163 level in mind. Some were keeping the flows outside as exporters are allowed to keep foreign currency abroad for a stipulated period after booking of consignment. They usually wait for lower currency value (depreciation) to earn better margins in Pak Rupee. For example, if an exporter is betting at 160 that PKR/USD goes to 162-163, he would wait for that to happen before bringing the proceeds back.

The exporters have herd mentality. Most of them bet in the same direction, and mostly it becomes self-fulfilling prophecy i.e. the currency moves in the direction they want quicker than the rate at which it should under normal flows. But improved sentiments, upbeat momentum in remittances, and government credit facility on oil movement kept the currency from moving in the other direction. The central bank is happy to have flows in the form of RDA – mostly don’t touch the interbank market but add to SBP’s reserves.

It is a game of patience. Exporters slowly started selling in the market and the parity reached 157.13 on 3rd March. The currency remained flat thereafter till 15th March. On 16th March, SBP released the Real Effective Exchange Rate (REER), after an unusual gap of two months. The reading of Jan21 was surprising for many. Last published data was of Nov 20 where REER was at 99.36 and in Jan 21 the REER appreciated to 95.32.

That was a surprise for a few and a shock for others (read exporters). Seeing this, many brought back dollars in anticipation of further nominal currency appreciation. In the last three trading sessions (16th to 18th March), the currency appreciated by 0.98 percent to close at 155.45 yesterday.

The question is what the market direction will be from here on. It is hard to say, as SBP is not intervening anymore. Some say that SBP should buy dollars from the market to build reserves. If that is the case, then SBP should buy when the PKR is depreciating as well. Why have one side bias? If SBP always buys in case of better inflows, then the currency could only depreciate.

Having said that, SBP’s stated policy of intervention is to curb high volatility. That is not the case as of now. The sentiments are positive. Inflows are persistent and the demand is low due to deferment of loans repayment and utilization of oil credit facility. The interbank market has oversupply. The natural movement is appreciation of the currency.

The currency traded at 154.95-155 yesterday. But it closed at 155.45. The movement at this level is important. Exporters sold higher amount on Wednesday and calmed down a bit on Thursday. Seeing this, market can remain range bound in days to come. However, if it breaks the psychological level of 155, then stars predict that the currency could potentially appreciate more.

The other important element is the monetary policy and its language. The market interest rates are significantly higher than the policy rate in anticipation of increase in policy rate. This might not happen tomorrow, and if SBP gives a direction of measured and slow increase, the secondary market yields may fall tomorrow onwards – already 3Y PKRV is slightly down in the last two trading sessions.

The currency market sentiments and tomorrow’s monetary policy communication are the key to gauge the future direction of PKR.