Rupee closes week on a sluggish note

Saturday, 30 January 2010 13:58

Forex Research - Weekly Reviews

Trend Analysis:

Market Overview:
Dollar showed a consistent trend in the open and inter bank market this week but the fluctuation in the exchange rate remained range bound. After touching Rs. 86/- mark for the first time during last week’s trading, the dollar continued to trade at the same level except on Tuesday which can be further seen from the table and its chart. The overall trend of the market can be termed as stable but demand pressure continued to prevail in both markets this week too.

Trading Trend:
The national currency failed to post any recovery at the start of new week’s trading. In fact, it lost another 10 paisa as greenback was changing hands at Rs. Rs. 85/60 for buying & Rs. 86.20 for selling respectively. In the interbank on the other hand, the dollar traded at Rs.84/56 for buying and Rs. 84/62 for selling.

Rupee lost more grounds against greenback in the open and interbank dealings on Tuesday as well. It lost another 10 paisa as greenback was changing hands at Rs. 85/30 for buying & Rs. 86/30 for selling respectively. While in the interbank, dollar traded at Rs.84/55 for buying and Rs. 84/65 for selling.

Rupee lost more grounds in both markets on Wednesday as greenback was changing hands at Rs. Rs. 86/00 for buying & Rs. 86/50 for selling in the open market. In the interbank, the dollar traded at Rs.84/55 and Rs. 84/62.

Rupee lost more grounds against greenback in the open and interbank dealings on Thursday as well and failed to post any recovery.

The dollar continued its winning run against national currency in Friday’s open and inter bank markets trading and rupee yet again failed to post any sound recovery on the desks. There was further increase in buying pressure in both forms of the market since it was Friday. Rupee was also a victim of dollar’s same trading pattern on the international desks where the currency was seen in demand ahead of US GDP data which is expected to show better numbers in the data scheduled to be released later in the day.

The same trading trend prevailed on Saturday too. However no change in the local price of the dollar was seen and hence the national currency closed weak on a steady note.

Market Analysis:
Factors behind huge demand: 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 but the greenback is being smuggled too. President Forex Association of Pakistan Malik Bostan has confirmed these reports while talking to various media sources. 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.

Factors behind huge demand: Interbank
In the inter bank on the other hand, the central bank had stopped providing dollars to the oil companies under International Monetary Fund’s lending framework to correct macroeconomic imbalances. 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. 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. The banking channel of the country is now paying about 100 percent of the entire oil import bill which stands above US $5 billion.

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.

SBP’s statement regarding current state of rupee:
The central bank issued a statement here on Wednesday to clarify its position on the current free fall of rupee against dollar and said “it is flourishing for rupee to see gain or loss in forex market trading as compared to other currencies. This gain or loss in rupee value in forex market gains ability in rupee to sustain any sudden extra-ordinary ups and downs in its value.” The statement further said that “current rate of rupee value in forex market trading does not reflect any formidable situation or any extra pressure.”

Our Analysis of the statement:
Such statement from the central bank reflects its two fold strategy. Firstly it highlights that SBP’s strategy to allow depreciation of rupee being followed under IMF terms and conditions. We had also stated this fact in our earlier reports that after IMF arrangement in Nov. 2008, SBP was supposed to transfer the entire oil payments burden to the inter bank instead of financing it through its reserves which will ultimately result in depreciation of rupee. By declaring that the current market situation does not reflect any extra pressure; the SBP has made it very clear that the current level of rupee against the US dollar is ‘acceptable’. This implies that there would be no intervention from the SBP in the near term as it was expected earlier. The analysts earlier were of the opinion that the State Bank may intervene anytime to stabilize the market but it does not seem to be a possibility any more.

Secondly as we had already stated in our earlier report that it will be important to see that up to which level SBP would allow rupee to depreciate. The current statement gives a clear cut direction that more depreciation may be allowed and hence the current market situation would prevail at least in the short term.

The tone used in this statement is of significant value and seems an effort to cool down the market under the present circumstances.
No action against dollar smuggling & huge funds transfers:
It is interesting to note that SBP has yet not addressed the issue of dollar smuggling which is reportedly one of the major reasons of rupee’s rapid depreciation off late. The market has not seen any solid steps from SBP to combat this situation despite of the fact that the central bank had taken serious action against leading exchange companies in Nov. 2008 when dollar had reportedly crossed Rs. 85/- mark. But at this point of time when even the President Forex Association of Pakistan Mr. Malik Bostan has openly told the media about the issue of dollar smuggling and that the hundi & hawala operators are taking full advantage of the current situation, the State Bank is not looking ready to take any action for unknown reasons. Had it been only the genuine pressure in the market, the current stance of the central bank would have been clearly understood but under the present circumstances, it is not.
Despite of unusual market movements, State Bank’s acceptance of the same has surprised many analysts.

Short term outlook:
We don’t expect any major change in the market trend and especially no major recovery in the exchange rate. Keeping ahead the huge volume of demand, it would be unrealistic to say that increase in supply from the State Bank or the central banks would bring much needed stability in the market. If supply gets better, we may see some stability as we saw it during the current week but on the other hand, SBP’s lack of action to address the speculative forces, rupee is likely to trade under pressure in the coming week too.

Source : Kalpoint (Content Department)