KARACHI/HOUSTON: The rupee continued to move on the downward trajectory on Tuesday, losing another 2.23 per cent to the US dollar in the interbank market, but analysts believe that there is still room for further depreciation.
The State Bank of Pakistan (SBP) quoted the rupee at Rs110.63 to a dollar compared with the previous closing of Rs108.41. In early session, it traded at Rs111.50. In open market, the rupee traded at 111.80/112. Thus, the dollar has gained Rs7 during the last three days.
Traders and dealers said the rupee was broadly lower as the currency’s fluctuation kept the market participants uncertain about whether there would be gradual increases or rupee would find stability at the 110 level.
The rupee, which has mostly traded in a tight range of 104-105 per dollar since December 2015, shed over five per cent in the past three sessions. “The central bank decided to let the currency find its equilibrium based on demand and supply,” Mohammad Sohail, chief executive officer at Topline Securities, said.
A currency dealer said it seemed the central bank continued with its policy to allow the adjustments in the exchange rate to help contain balance of payment pressures. Analysts said the rupee was likely to lose value further as it was overvalued by more than 10 per cent, indicating a room for further decline.
“The current price movement shows the unit to extend losses,” an analyst said. “The market is anticipating a new support level of 112 in near-term.” Another analyst said the rupee was unlikely to consolidate at the 115 level.
The government has so far adopted a strong rupee policy and converted the regime into an almost-fixed exchange rate – one that caused drop in exports and remittances. The rupee devaluation might be in line with the demand of the International Monetary Fund, which has always advocated a flexible regime to allay balance of payment difficulties.
Overvalued exchange rate discouraged exports, encouraged imports and kept the rupee cost of foreign debt servicing below what it should be under an appropriate level of the rate of exchange.
But, an analyst said the timing of depreciation is a bit unfortunate “as we’ve just floated Eurobond and no investor likes uncertainty”. The SBP’s withdrawal of support for the rupee was widely seen as a devaluation measure since the central bank is the most influential player in the thinly traded local foreign exchange market and controls what is widely considered a managed float system.
“Presently, the central bank is allowing the market to determine the rate, but it seems to be reversing the extreme volatility if any during intraday trading,” Muzzamil Aslam, chief executive officer of EFG Hermes Pakistan, told Reuters.
The central bank said after market hours on Friday that a weaker rupee would help the economy grow and ease balance of payment pressures, comments that market participants interpreted as SBP’s approval of a weaker rupee. “I see the rupee settling somewhere from 110 to 111, I think it would not be allowed to pass 112,” said Samiullah Tariq, director of research at brokerage firm Arif Habib.
Meanwhile, traders and currency dealers criticised the SBP for not removing the price cap and warned that speculators were active in the market, which could make the situation out of control, resulting in alarming price hike. They said the country was dependent on imports and the prices of imported items would increase by 8 to 20 per cent, as importers were going to face increased shipping, delivery and port charges.
Forex Association President Malik Bostan said the dollars price would increase alarmingly if the SBP did not intervene, adding that the federal bank must announce maintaining the dollar price at Rs110-112 otherwise the speculators would take advantage of the situation. On the other hand, oil prices slipped on Tuesday, retreating after an early surge to a two-year high when the United Kingdom’s biggest North Sea oil pipeline was shut, crippling the flow of global benchmark Brent crude.
The Forties pipeline, which was scheduled to pump 406,000 barrels per day (bpd) in December, was shut on Monday after cracks were found in what traders believe is the first unplanned outage for some years. That pushed Brent prices higher on Monday, and the rally continued into Tuesday morning before prices retreated during US trading hours.
Brent crude, the global benchmark, was down 67 cents at $64.02 at 1646 GMT. Earlier in the session, Brent rose above $65 a barrel for the first time since June 2015. The US crude was at $57.47, down 51 cents.
Forties is important for the global oil market because the crude it carries normally sets the price of dated Brent, a benchmark used to price physical crude around the world and which underpins Brent futures. The WTI-Brent spread widened out to as much as $7, the highest in more than two years, then narrowed to $6.50. WTI has lagged Brent, and the discount has helped boost US exports.
“The rise in Brent is going to drive WTI up as opposed to WTI dragging Brent down,” said Phil Flynn, analyst at Price Futures Group in Chicago.
Analysts and traders said the outage was likely to cause significant delays in the loading of Forties crude cargoes. “There are (still) going to be loads,” a trade source said, adding that the number was hard to estimate until the pipeline’s restart date is known.
US crude stocks are expected to fall by 3.8 million barrels, a fourth straight week of decline, according to analysts polled ahead of reports from industry group American Petroleum Institute and the government’s Energy Information Administration.
The API is scheduled to release its data for last week at 2130 GMT on Tuesday. The EIA follows on Wednesday. Oil supply cuts led by the Organization of the Petroleum Exporting Countries this year have helped whittle away an excess of inventories that persisted for nearly three years. US crude has lagged the rally in Brent in part because of rising US oil production.