Rupee crosses Rs. 86/- mark for the first time in the open market

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Weekly Updates - Rupee in a flash

Trend Analysis:

US Dollar
Day Date Buying Selling
Tue
19/01/2010 85.30 85.60
Wed 20/01/2010 85.30 85.50
Thu 21/01/2010 85.60 86.00
Fri 22/01/2010 85.55 85.85
Sat 23/01/2010 85.50 86.00

Overall trend:
Rupee traded at new lows against greenback in the open and interbank markets through out the week and ended on a negative note. Dollar touched a new level on every new day and the same trend continued to prevail during the whole week. A consistent increase in the exchange rate was seen and no major recovery at any stage was witnessed. For the first time in the history of currency trading, the dollar touched and even traded above Rs. 86/- mark in the open market whereas, the difference between inter bank and open market rates also widened further this week..

Daily Trend:
Dollar continued to enjoy gains in the open and inter bank markets on Monday & Tuesday as demand continued to drift the national currency lower on the desks. No major change in trading as well pricing trend was seen when compared with last two weeks’ trading. Heavy demand from the corporate sector & individuals continued to rule as greenback traded at Rs. 85/30 for buying and Rs. 85/80 for selling in the open market and was looking all set to cross Rs. 86/00 barrier in the coming sessions. In the inter bank on the other hand, dollar traded on Rs. 84/65 & Rs. 84/85.

On Wednesday, greenback marched higher against rupee in the open and interbank markets for the third consecutive day, but the margin of gain remained minimal. Range bound trading was witnessed in both forms of the market. In the kerb where dollar had closed at Rs. 85/30 on Tuesday was changing hands at Rs. 85/40 whereas in the inter bank, dollar was trading at Rs. 84/55 as against its last day’s closing price of Rs. 84/65. Thus a gain of 10 paisa in the kerb and a loss of the same value were seen in the price of dollar.
No major change in the trading as well as pricing trend was seen in the open and inter bank markets on Thursday too as dollar continued to shine on the currency stands. More gains were recorded as dollar traded at Rs. 84/52 in the inter bank and at Rs. 85/50 in the kerb.

The dollar finally touched Rs. 86/- barrier for the first time in the history of currency trading in the open market on Friday as demand pressure continued to push rupee on a historical low. Rupee lost another 50 paisa in the open market as the dollar was trading at Rs. 85/50 for buying and Rs. 86/00 for selling. USD however remained steady in the inter bank and continued to trade at its overnight closing price of Rs. 84.52.

The same trend was witnessed on Saturday as well and the national currency failed to post any recovery in weekend trading. In fact, it lost another 10 paisa as greenback was changing hands at Rs. Rs. 85/60 for buying & Rs. 86.10 for selling respectively. In the interbank on the other hand, the dollar traded at Rs.84/58 for buying and Rs. 84/80 for selling.

Market Analysis:
Open Market: Rupee is persistently losing its shine against dollar not only on fundamental & technical grounds but also due to speculative trade. Some elements are very active these days to take advantage through their short positions moves and are making gains out of this volatile market. Such buyers are demanding dollars in huge volumes whereas funds transfers have also rapidly increased in the last two weeks. According to market sources, the average demand of greenback has gone up to US $ 4-5 million daily as compared to US $ 2-3 million earlier. Rapidly changing scenario after NRO judgment of Supreme Court of Pakistan and already dismal economic performance for quite sometime now especially due to security and law & order situation of the country; an increase in funds transfers is being recorded as well.

The speculative forces are not only minting money these days but the greenback is being smuggled too. President Forex Association of Pakistan Malik Bostan has confirmed these reports while talking to various media sources. According to Mr. Bostan, dollar’s demand has increased amid its smuggling to Afghanistan. He confirmed that the smuggling of dollars to Afghanistan had increased these days which had created shortage and have pushed the prices up. He has further said that the banks are charging 75 paisa per dollar on transactions made by the overseas Pakistanis; however, ‘Hundi’ and ‘Hawala’ dealings are benefited by this act. This is also a reason behind decline in dollar’s supply.

The difference between open and inter bank dollar rate is also widening which is creating an obvious room for illegal transactions of the currency. Usually the hundi and hawala operators find such market situation attractive as the customers try to get advantage of a higher rate of dollar on their remittances.

However as it was being expected, the central bank finally called a meeting of exchange companies’ on Wednesday and directed them to ‘cool down’ the market. When told by exchange companies that supply needs to be increased immediately, the central bank has given the assurance that the supply of dollars will be improved. “The State Bank has assured proper supply of dollars to the exchange companies,” said Malik Bostan who attended the meeting with the SBP.

It needs to be seen that up to which level the central bank would allow rupee to depreciate.

The open market rate is also increasing as dollar is trading on a record level in the inter bank market as well. Technically, when there is an increase in the price of greenback in the inter bank, the dollar goes stronger in the open market as well.

Interbank:
In the inter bank on the other hand, there has been an anticipated pressure on national currency since last six weeks. This depreciation was anticipated in the sense that the central bank had stopped providing dollars to the oil companies under International Monetary Fund’s lending framework to correct macroeconomic imbalances. Pakistan had signed an agreement with the IMF in November 2008 that bounded the State Bank to pursue a flexible exchange rate policy. Under the IMF conditions, intervention in the foreign exchange market by the SBP (including the provision of foreign exchange for oil imports) will be aimed at meeting the given reserves target. The IMF programme had set February 1, 2010 as the last date for the SBP to shift the entire oil import bill payment to the interbank market.

After this agreement, State Bank of Pakistan had shifted all the crude oil related payments towards the banking sector of the country in accordance with the International Monetary Fund (IMF) from December 14. It was decided that all purchases of foreign exchange related to import of crude oil shall also be made by the banks (ADs) from the Interbank Market. Earlier in February 2009, the central bank had shifted high speed diesel import payments to Interbank Market, while on July 15; it shifted its POL import burden to the banks as well.

The banking channel of the country is now paying about 100 percent of the entire oil import bill which stands above US $5 billion. Earlier, the central bank was using its foreign exchange reserves for importing crude. The lending framework now bars the central bank from using its foreign exchange reserves to make import payments.

The oil companies/refineries hence are now borrowing from the inter bank for their oil imports. The banks are rushing in to arrange foreign currency for importers of petroleum products and crude oil. Further, the quarterly payment requirement from the corporate customers is adding more demand pressure and hence, this huge demand is causing a free fall of rupee.

Short term outlook:
Keeping ahead the fact that State Bank has met exchange companies members this week and has assured of smooth supply of dollars to them, we expect a slight steadiness in the exchange rate if it happens so. Increase in dollars’ supply to the exchange companies would likely help in covering the market demand which in turn would ultimately help to control the free fall of rupee up to some extent in the next week. We may likely see some gains therefore.

However, we don’t expect any major recovery in the price of rupee since inter bank rate of dollar is also high. Given the fact that demand is persistently getting higher in the open market and there is a pressure on the supply side too; this increase in supply of dollars may not prove to be a permanent solution to control the rapid depreciation of national currency.


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