Currency update: Rupee likely to remain under pressure next week

• Hefty current account deficit, surging oil prices, and volatility in financial markets amid the Ukraine crisis might weigh on the domestic currency.
• The local unit fell by 1.36 rupees or 0.77% against the dollar the outgoing week. 
• The foreign exchange market is concerned about the increasing pressure on the balance of payments, says a forex trader. 

KARACHI: The Pakistani rupee is expected to remain under pressure next week as a hefty current account deficit, surging energy and oil prices, and volatility in financial markets amid the Ukraine crisis might weigh on the domestic currency, say analysts.

The local unit fell by 1.36 rupees or 0.77% against the dollar the outgoing week. It started the week on 175.75 per dollar and closed at 177.11 on Friday.

The all-time high current account deficit of $2.5 billion amid high global oil and other commodity prices seems a chief worry as it’s increasing the dependence on foreign loans to meet its finance requirements, especially in a situation when imports are growing at a faster pace than exports.

“The foreign exchange market is concerned about the increasing pressure on the balance of payments, despite the fact that the central bank has said there is enough financing available to fund the deficit and the foreign exchange reserves are also at a comfortable level,” said a forex trader.

Besides, the Russia-Ukraine conflict presents uncertainties for Pakistan’s rupee alike for other global and regional currencies, the trader added.

“We intend to take a cue for the rupee from how the government manages the current account deficit and what measures it takes to improve the current account balance,” he said, adding, investors also assessing the Russia-Ukraine situation and sanctions imposed by the US on Moscow.

“The uncertainty related to the current account and the geopolitical tension will exert pressure on the rupee in coming week.” However, some traders were seen with expectations for the local unit to consolidate within the existing trading range.

The real effective exchange rate (REER) would also help guess the future direction of the rupee.

The REER clocked in at 97.03 as of January, compared with 96.80 in the previous month, according to data from Arif Habib Limited.

The REER rose 0.24% on a month-on-month basis. However, it fell 2.76% so far this fiscal year, it said.

Traders are now looking towards Pakistan’s interest rate scenarios, said Tresmark analyst. He was of the view that the crisis had brought in a surge in commodities, and the rise in oil and energy prices were going to translate into elevated inflation levels, but slightly shielded from higher base effect of the previous period.

“And with Ramadan around the corner, food prices will also surge,” he mentioned.

He shared that elevated inflation would test the State Bank of Pakistan (SBP)’s resolve to keep rates unchanged, and analysts expect status quo to be the path of least resistance, provided the local currency remains checked and foreign exchange (FX) reserves stabilise.