The US dollar liquidity in the foreign exchange market has recently received a boost, which is expected to help stabilise or even appreciate the Pakistani rupee in the coming days, according to analysts. The boost comes from an increase in three and six months forward premiums and a decline in the central bank’s net short positions. Remittances and dollar selling by exporters in forward transactions have also contributed to the improvement in US currency supply in the market. As a result, analysts predict that the rupee would likely remain stable against the dollar, with some even suggesting a slight correction in favour of the Pakistani currency.
USD Supply Boosted by Rising Forward Premiums and Declining SBP Net Short Positions
Optimus Capital Management has cited data suggesting that “USD supply in the interbank market has considerably improved as manifested in rising PKR/USD forward premiums and declining SBP net short positions”. The rise in forward premiums means that the cost of purchasing dollars in the future has increased relative to the present, indicating higher demand for dollars. The decline in the State Bank of Pakistan’s (SBP) net short positions means that the bank has reduced its net obligation to pay dollars in the future, which further contributes to the increase in US dollar liquidity.
Analysts Predict Rupee Stability
Fahad Rauf, head of research at Ismail Iqbal Securities, has explained that the SBP does a currency swap, mainly with local banks. A net short position for the central bank means that it will have a liability to pay dollars when the deal settles. According to analysts, the recent improvement in US dollar liquidity would likely result in the rupee remaining stable against the dollar. Mustafa Mustansir, head of research at Taurus Securities, suggests that the PKR would remain stable compared to the USD, and even undergo a slight correction in the coming days.
Conclusion
The recent increase in US dollar liquidity, particularly through rising forward premiums and declining SBP net short positions, is expected to stabilise the Pakistani rupee against the dollar in the near future. As remittances and dollar selling by exporters continue to contribute to the improvement in US currency supply, analysts remain optimistic about the outlook for the rupee in the coming days.
