The currency market has been moving smoothly for the past month because the PKR is stable in both the interbank and open market as there is urgency in buying, hurriedness in imports, or slackness in bringing back export proceeds. The PKR is slowly appreciating at a snail’s pace. The general perception is building that the PKR will remain stable (or will slightly appreciate) in the short run.
An interesting element was observed yesterday, as, after a lull of a few weeks, exporters came into the market to sell heavily in forward. At a time when the currency was appreciating (Sep and Oct), exporters were selling in forward around $150 million on average daily, and then the number slowed down to a small fraction. However, it picked up again yesterday, and around $100 million were sold in forward by exporters. It is too early to say if it’s a one-off blip or a trend, but an interesting data point to ponder upon.
Over the weekend, there was a report by someone that PKR is heading below the Rs280 mark, and on Monday morning some exporters came to sell in forward. And then throughout the day, the forward selling by exporters remained healthy. This was confirmed by both currency dealers and exporters.
Some textile exporters have better projections of export proceeds in the second half of the fiscal year as compared to the first half. Three out of the country’s top ten exporters expect their export proceeds to increase by 10-15 percent in the second half, as the retailers in the buyers’ market expect the demand to go up due to the economic recovery in their markets. And that is resulting in higher order booking.
The exporters tend to maximize their gains by bringing the dollar when the currency rate is favourable. When the PKR was depreciating (before Sep 23), they were delaying the inflows while there was almost no selling in forward, and later, when the PKR started appreciating, due to a crackdown on smuggling, they started coming in large numbers to sell in forward.
The forward selling quantum was high at that time but selling was mostly in 1M and 2M forward, as they were not expecting PKR appreciation, at that time to last long. Interestingly, yesterday, out of around $100 million forward selling, some sold up to 6M. This implies that some are seeing the stability to last. However, many are still uncertain about this economic stability continuation due to political hiccups.
The export forward premium is low, as 1M traded at a premium of Rs2.9 and 2M was below Rs5. This implies that some exporters are perhaps buying the story of PKR/USD going below 280 in the short term.
There are reasons to bet on it. One is that SBP reserves are up by $1.3 billion (19%) in the last two weeks, as multilateral pending inflows are coming in, and the IMF board approval for the next tranche is very much expected this week. The other reason is that global commodity prices like that of energy are easing, and that bodes well for importing countries like Pakistan. This makes the case of inflation coming down stronger, as analysts expect headline inflation to be around 17-18 percent versus 31 percent in 2023. Then the policy of keeping current accounts zero (by making banks meet inflows and outflows) is working fine.
These are good signs for PKR, as lower inflation is likely to keep REER in check at current nominal currency levels. Then in 2024, the global interest rates are likely to come down and that will put less pressure on PKR if the monetary policy eases at home in 2024.
Thus, it’s a good time to lock in PKR for those who are still at the periphery.
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