We may be seeing a remake of July when Rupee crashed from 210 to 230 in a matter of days. The only difference is that then it was the interbank market that led the rally and this time it is the open market. Last time, analysts thought SBP didn’t take any significant interventionary action to bring order to a chaotic market, and this time, it seems we may go the same way. Some cosmetic actions of calling meetings with money changers/bankers and threatening action can be seen, but no decisive action. Last time we were fraught with IMF uncertainty and lack of FCY liquidity, but this time we are not so handicapped. This makes one think whether there even is a strategy in place – because there should be one – a weaker Rupee will have crippling effects on inflation, business sentiment, productivity, fiscal space & growth. It seems that beyond engagement with the IMF, there is no concrete economic plan. The temporary hold on imports has shifted the problem to smuggling from Afghanistan against cash dollars payments, which has increased appetite for dollars in the open market. Other secondary factors are, cash forex requirements for Dubai travelers, declaration of dollars from inbound passengers, severe accessibility issues for encashing in parts of all provinces. The difference between the Interbank & open market is creating an incentive for FCY accounts to withdraw USD & sell in to the open market. Where-as ultra-low interest on FCY accounts is not helping in attracting fresh FCY deposits. Analysts do see multiple opportunities for inflows, including friendly countries, bilateral institutions and flood related inflow from sovereigns. There is also a high probability that the mandate with IMF may be increased by about $2.5bn. But the energy crises in Europe is going to test & stretch the global financial markets. As a consequence to the price caps in EU, fiscal deficits will be stretched, which will mean floating more bonds at higher rates to attract investors. This in turn will put severe stress on all emerging market assets and their currencies will loose further value. Considering this scenario, it would be prudent to lock in a financing plan at the earliest because a external financing will quickly become hard to find. Considering the above, traders should square their positions as they come, although USDPKR may most likely see some correction in the coming week to the fair value bracket of 222-226/$.

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