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What is happening with the Rupee – Two

Earlier in March I asked What is happening to the Rupee? Despite two weeks of digging around, I still don’t have an answer. But I have numerous pieces of the puzzle that can be used to form the outline of a partial answer. Here are the conversations I have had with Interbank trading friends.

Opinion One: From a trading point of view some traders (a small minority) are talking the Rupee up by another 2 rupees over the next two to three months (target rate 81-82 per USD). In simple terms the carrying cost of the US dollar in this market is about 11%-12% per annum (the different between KIBOR and LIBOR interest rates). What that means is if you are a bank and if you have dollars you can sell them in the local market for rupees earn the interest rate differential and at the same time buy the dollars back at a higher price a week, two weeks or a month later. When you combine this with the current yields on short term treasury bills in Pakistan, a holder of Tbill that realizes a rupee appreciation in the Rupee will add about one percentage point to his holding period return.

Opinion Two: During the last two weeks the market was long US dollar on account of two large outgoing payments. When the payments were delayed, the carrying cost factor (see Opinion One above) came into play. Further pressure was created by the inward arrival of about 70 million dollars of Telco money (acquisition in the making), 20-30 million dollars of Silk Bank right share issue cash, and some additional change for an oil well drilling expense. Whenever the market is long or short by a hundred million dollars, the market panics which is what happened. The exchange rate dipped and broke through 84.0 and headed towards mid 83. Given that the two payments have now been dispatched and the money is out of the system and the market is no longer long by an extra hundred million, there is a good chance that the dollar may appreciate again in April.