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Bad news for Asian FX, esp PKR

Pakistani monetary authorities can only count their sorrows as King Dollar’s unrelenting advance pushes Asian currencies to lows not seen in months, in some cases years, robbing the Pakistani rupee (PKR) of any hope of a miracle to put a floor under its own unprecedented collapse. Now the State Bank must reckon not just with rupee weakness, but also dollar strength, when the monetary policy committee (MPC) meets in a few days. The market’s already been fretting about a possible 200 basis point hike, and it seems its fears are about to come true.

Pakistan will also watch helplessly – its hands tied by the IMF programme – as others (possibly) intervene in the money market to stabilise their currencies. Japanese currency authorities minced few words as the Asian market opened on Wednesday, warning speculators of “strict action” as the yen (JPY) shows no signs of paring some of its 7.7 percent loss since its 14 July 2023 peak. Almost immediately, the Chinese central bank made similar noise as the yuan (CNY), down 6.2 percent since its 4 May 2023, has reached its lowest trading level since 2007.

That’s not all. Bloomberg recently reported that Taiwan actively intervened in the market by selling dollars for the first time in a year this August to support its currency, the new Taiwanese dollar (TWD). Also, Thailand’s central bank has warned that further drops in the baht will force it to intervene as well. The triple jeopardy of the dollar and oil rising at the same time, just when China faces a 2008-like deflationary scenario, is putting added pressure on Asian FX and delaying the case for monetary easing amid fears of a wider and deeper currency crisis. Elevated interest rates will, of course, diminish the appeal of local currency bonds, which explains why Indonesian and Thai bonds are seeing foreign outflows this month (Bloomberg).

Elsewhere, the British pound (GBP) and euro (EUR) are also at their lowest levels in at least a quarter as traders bet on the European Central Bank (ECB) cutting rates sooner and faster than the Fed because the fallout of the Ukraine war, among other things, is stagflating the eurozone’s leading economies. This gives the dollar further potential upside as a weak China, weaker EU and stalling emerging Asia make Uncle Sam’s greenback the safest haven for big money. There are also reports that the big boys of global FX are reversing bets against the dollar, which piled on as its earlier weakness gave the impression that it was overbought. It’s no surprise that PKR has been the worst performer even in the dismal Asian FX market, dropping almost 12 percent since mid-July – Indian rupee (INR) has depreciated less than 2 percent in this time. This is significant since the caretaker government has just been denied any sort of tax and/or subsidy leverage in energy tariffs, which means it can offer no relief to angry, bill-burning protesters who threaten the kind of uprising that this country’s never seen before. PKR’s weakness will continue to make things worse because the dollar price of essential commodities like oil and energy is higher in some neighbouring countries, but the rupee rate is pushing them out of reach of most people in times of record inflation and unemployment.

Let’s not forget that unlike most other countries, we’ve managed local currency weakness on our own. The rupee went through the floor even when the dollar wasn’t flying at dizzying heights. Now, with more downward pressure on the local rupee, and further upward pressure on energy and oil prices, and of course, interest rates, how much longer will the central bank have to raise rates to try and check inflation that stems from structural weakness in capital markets, the farthest thing from runaway aggregate demand?

Shahab Jafry, "Bad news for Asian FX, esp PKR," Business recorder. 2023-09-07.
Keywords: Economics , Currency crisis , Interest rates , Energy tariffs , Local rupee , Pakistani rupee , State Bank , TWD , GBP , IMF

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