Rupee expected to remain stable after volatile week, say traders

Web Desk

June 06, 2021

Positive sentiments in market for rupee after APG increases Pakistan's ranking on the FATF's recommendations.
There won't be a higher demand for dollar next week," says a trader.
The outgoing week was a volatile one for Pakistani rupee, due to increase in demand for dollar, spike in international oil prices.

The Pakistani rupee is expected to remain stable throughout the next week after the positive sentiment for the currency in the market following the Asia Pacific Group (APG) improved Pakistan's ranking on 21 of the 40 recommendations of the Financial Action Task Force (FATF).

Pakistan's rating has been improved with regard to money laundering and terror financing.

“Next week, we think because many importers have covered their payments, there won’t be much higher dollar demand in the market and so we may see the rupee to remain stable or strengthen just a little bit,” a trader at a commercial bank said.

“Pressure on the local currency is decreasing, hence we expect the local unit to trade in the 154.40 to 154.80 range in the week ahead,” he added.

“Sentiments are expected to be boosted by the positives of the FATF progress.”

APG has decided to move Pakistan from enhanced (expedited) to enhanced follow-up for outstanding requirements. Pakistan will continue to report back to the APG on the progress to strengthen its implementation of anti-money laundering and combating the financing of terrorism.

The outgoing week was a volatile one for the Pakistani rupee. An increased dollar demand due to import payments and a spike in the international oil, coal prices saw its demand decline in the first three sessions.

The increase in the Real Effective Exchange Rate (REER) and surge in trade deficit in May also put pressure on the local unit.

The REER surpassed the 100-mark for the first time since February 2019 and recorded at 103.29 in April.

The trade gap sharply widened 134% year-on-year to $3.432 billion in May.

However, despite these setbacks, the rupee managed to make some gains and maintained the rate of 154.62 against the dollar on Friday.

The recovery in the local currency was due to increased growth in exports, as well as stable foreign exchange reserves.

The rupee weakened 0.14% against the dollar this week.

Analysts expect the REER to spike in May by touching the 105 level but may most likely stabilise or recede on the back of falling inflation in subsequent months.

Declining inflation has also put interest rates under pressure with bond yields falling a few basis points in the shorter tenors in the last T-bills auction.

Traders are looking for clues for a potential rate cut but analysts believe the current policy rate is the sweet spot and the path of least resistance.