Currency update: Pakistani rupee expected to make gains against US dollar next week

• Pakistani rupee recovered and closed at 199.76 per US dollar in interbank market on Friday.
• With IMF deal on the horizon, analysts expect a 50% retracement to levels of 192-195.
• The rupee sank from 186-202 per dollar during the current month as reserves declined by about $900 million with no sight of fresh inflows.

KARACHI: Following the major hike in the prices of petroleum products by the government, hopes have risen for the revival of the IMF programme as analysts say that the Pakistani rupee is likely to start an upward drive against the US dollar in the next week.

The rupee recovered lost ground and closed at 199.76 per dollar in the interbank market on Friday. The domestic currency appreciated by 2.25 rupees or 1.13% after seeing a  consecutive decline for 16 sessions, The News reported. 

Traders started selling dollars after the government announced Rs30/litre increase in petroleum prices, an underlying condition of the IMF for the resumption of the Extended Fund Facility.

Analysts said the move helped ease some pressure on the local unit and a sustained IMF engagement with Pakistan would open up funds' flow from China, Saudi Arabia, World Bank, Asian Development Bank and International Finance Corporation.

“While this is great for the rupee and the economy, traders should be more cautious because the IMF approval will probably take time and come in after the budget is finalised and will seek more commitments to do more fuel hikes and the political uncertainty also need to cool down,” said Tresmark in a note.

“These seem to be on track at the moment, but markets will be volatile as fresh developments may change sentiment on a day to day basis”.

The rupee started its losing streak due to depleting foreign exchange reserves, but it sank from 186-202 per dollar during the current month as reserves declined by about $900 million with no sight of fresh inflows.

“With the IMF deal on the horizon, analysts expect a 50% retracement to levels of 192-195 if the above factors are under control. This is especially more credible as REER (real effective exchange rate) in March was at 96.83 (when rupee was at 184/$)”.

Tresmark said the market saw significant forward selling by exporters in the last two trading sessions. “We are of the view that the central bank should use this change in direction to make the rupee stronger which would expedite exporters realising proceeds,” it added.

“Forward premiums had plunged drastically (25-50% on various tenors) as banks were covering their dollar short positions by doing buy (now) sell (later) swaps to generate dollar liquidity".

With a change in sentiment in the last two sessions, premiums also recovered slightly with more gains in sight, it said.