USD/PKR: Pakistani rupee up for 6 weeks but 2 risks remain

The Pakistani rupee comeback continued this week even as the US dollar index (DXY) sits at the highest level in months. The USD/PKR exchange rate has dropped in the past six straight weeks and is now hovering at the lowest level since July 17th. This is the first time since 2020 that the rupee has risen for six straight weeks.

Why is the Pakistani rupee surging?

The Pakistani rupee has had an eventful performance this year. It initially surged to the highest level on record in October. At its peak this year, the USD/PKR pair was 36% above the lowest level in January and 104% above its pandemic lows.

The key event this year was the negotiations with the International Monetary Fund (IMF), which agreed to unlock additional cash for the country. These dollar inflows have helped to stabilise the currency quite a bit.

The Pakistani rupee has also surged because of the actions by the country’s government to crack down on currency manipulation. It launched this crackdown in September, a move it hopes will help it prevent capital flight.

The government also hopes to prevent unlawful foreign exchange operations and illegal trade. As part of this crackdown, the government is also working on cracking down on companies and individuals hoarding essential commodities abroad. This operation has netted the government over $2.3 million and arrested over 150 people.

US dollar has jumped

The Pakistani rupee surge has happened at a time when the US dollar has risen against most currencies, including the euro and sterling. It has jumped after the Federal Reserve pushed interest rates to the highest level in more than 2 decades. Minutes published this week showed that the committee hopes to deliver another rate hike.

Still, as I wrote before, the Pakistani rupee faces numerous risks ahead. For example, it faces the risk of the upcoming Pakistan election scheduled in January. Many emerging market currencies tend to weaken against a general election.

Pakistan’s election is notable because of the rising political risks in the country where Imran Khan has been jailed. The other risk is that the country faces a wall of maturity on $1 billion dollar bonds in April 2024. In August, the government said it hopes to rollover half of its $24.5 billion debts maturing in 2024.

Therefore, demand for US dollars to cover these bond payments could push the Pakistani rupee downwards in the next few months.