USD/PKR analysis: Pakistani rupee surge could be short-lived

The USD/PKR retreated to the lowest level since March 5th as investors reflected on the recent IMF bailout deal. The USD to Pakistani rupee price was trading at 275.38, which was much lower than the year-to-date high of 297.12. 

Pakistani rupee is still at risk

One of the most important emerging market forex news came recently when Pakistan reached an agreement with the International Monetary Fund. The deal means that the country will receive a $3 billion loan that prevented it from defaulting.

As I had written before, the country would have gone through its worst economic crisis in modern times if it defaulted. Therefore, the loan will give the government more room to execute a recovery.

Despite all this, I believe that the strength of the Pakistani rupee is an overreaction and that it will be short-lived. For one, data shows that most countries that receive IMF bailouts remain under siege for a while.

For example, the Sri Lanka rupee remains close to its record low despite the bailout that happened a few years ago. 

Further, Pakistan is still not out of the woods yet since it has billions of maturities coming due in the coming years. It has a $25 billion debt repayment wall starting this month. As such, analysts believe that the bailout funds were not sufficient. In a note, analysts at Fitch wrote that:

“While the IMF likely sought and received assurances for such financing, there is a risk that this could prove insufficient, particularly if current account deficits widen again.”

The other big risk for Pakistan is that demand for its goods is dropping internationally. The most recent data showed that the country’s exports dropped by 19% in June, the 10th straight drop. Imports have also dropped because of the devalued currency.

USD/PKR forecast

USD/PKR chart by TradingView

The USD to Pakistani rupee made a bearish breakout after the IMF bailout deal. Before the breakout, the pair had formed a head and shoulders pattern, which is usually a bearish sign. The pair has dropped below the 25-day and 50-day moving averages.

Further, the current price is important because it was the highest level on February 6th. The MACD has moved below the neutral point. Therefore, I suspect that the USD/PKR price will bounce back as the enthusiasm of the bailout ease. As such, I believe that the pair will retest the next key resistance level at 287.