Currency – the pendulum swing

PKR’s slow and steady appreciation continues in the interbank market, as PKR/USD has reached 290 from 307 in 16 trading sessions. Now some in the market have started believing that this could get down to X, Y, and Z levels. A word of caution for those, as they might not be reading it right. Everyone knows that a crackdown (rather more of a fear of a crackdown) on smugglers and hoarders is working. And that has washed (for the time being) all the shades of grey in the open market. The chase has flipped. Earlier, the open market was chasing the interbank, and now it’s the other way around. Thus, the key is to look at the interbank market and its intricacies.

A month back exporters were delaying the inflows, remitters were moving fast to the informal open market and importers were hurrying to make payments, as everyone and their mother were expecting PKR to depreciate. Now the pendulum is swinging the other way around. Exporters are coming from left right and centre to sell. Those who were delaying the inflows are bringing dollars in the spot. Others are selling in bulk in the forward market. The flurry of inflows from exporters has even surprised banking treasury folks.

The remittance flows have improved as well. The numbers were better in the second week of September with some tapering off in growth in the third week. One big bank is showing growth of 8 percent while the other has 13 percent this month so far. Flows are expected to be high this week, and overall, September’s number is likely to be around $2.3-2.4 billion.

On the flip, importers are lazing around. They are delaying payments as much as they can. If an importer has five days to pay on L/C – he will wait for the fifth day while others are using other means to delay it. Interestingly, all these importers were pushing banks to clear payments when PKR/USD was over 300.

The good news is that SBP has allowed banks to pay pending dividends (up to $10m) for 2022. However, big companies are still waiting. For example, one telco’s $100 million is pending and there is no jazzing up for its shareholders. Then in one FMGC, 150 million Euro is awaited - no feast for the company’s principals.

Anyhow, Interbank is overflowing; with an estimated $200-250 million buying by the SBP in the last sixteen sessions. The party is on. But like any indulgence, there could be a hangover. It’s better to not overdose.

Our interbank market is shallow and has a herd mentality. The situation can flip the day PKR/USD closing is higher than the previous day. Exporters would vanish and importers would flush in. That will make the interbank flows net negative and PKR will start sliding.

With exporters selling too much in the forward market, there might not be many to sell in spot when the crunch comes. However, if, the open market remains in check, remittances will continue to grow and could cross $2.5 billion in October. Then SBP may also intervene to keep the volatility in check, as it has already met IMF’s NFA targets for September. Thus, the to-be depreciation would be slow and checked.