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Six-month forward dollar premium hits all-time low

KARACHI (January 20 2003) : The dollar took the battering after broad based sell-off during the week due to selling by exporters and large inflows of funds from Pakistanis living abroad.

The dollar also look the thumping in tenor. Three-month forward was dealt at 3 paisa discount. Six-month forward dollar broke all-time lows of 20 paisa to hit the new lows and was dealt at one paisa premium in the interbank market.

Meanwhile, importers are still showing confidence in the rupee despite unloading of expensive foreign debts and large size payments, which helped the dollar to make a technical correction, pushing it to test the highs of Rs 58.35 during the second week of January.

The dollar continues to bite the holders of foreign exchange and now looks ripe to test the downside against the rupee as Rs 58 per dollar. In interbank market it is at a handshake distance.

With the IMF team already knocking at the door, the fall is imminent, says. Asad Rizvi of Currency Market Associates.

The treasury manager of a foreign bank says, “The exporters are now in a fix because of the sham fall of dollar against the rupee, in spot as well as in forwards. The fall of forward premium is mainly due to constraint in the banks Nostro position. The logic is very simple: the exporters are aware that the overseas Pakistanis would not risk keeping their money abroad.

Hence, the flow of foreign exchange will continue to flood the market. While holding of dollars for longer period of time would be artificial and the central bank cannot afford to support the buck, therefore, from exporters' perspective, even if they sell three or four-month forward dollar at par, they believe that they will be better off as the rupee is likely to gain further strength by the time it matures.

An Executive of a multinational, which has large import base, when approached for his comments, said, “In my lifetime it is for the first time that everything looks bright for Pakistan's financial sector, with hardly any negatives.

The stock market is roaring; every day the foreign exchange reserves are piling up; the real estate market has skyrocketed; and, most importantly, the government is now stable.

With all positive factors the rupee would continue to gain strength. So, why should I take a forward hedge knowingly when everything is on the up? Why should I pay the premium? What for?.”

Asad Rizvi of CMIKA added, “We favour sham fall of dollar and, for that to happen, the central bank has to apply brakes, for a moment, as commercial banks are short in Nostro. Which means, temporarily it has to hold its outright purchase of dollars from the interbank market and then, after filling the stomach, it should continue with its earlier strategy of buying forward dollars from the interbank, as it has done in the past.

But aggressive buying is required by the central bank to support to push premiums higher, which also helps the exporters' cause. All this could prove to be a costly affair because at the time of maturity the State Bank of Pakistan will suffer exchange loss.

“Meanwhile, rupee is surplus in the interbank market, which is also hurting the forward dollar premium.

At present, we estimate that the market should be liquid by Rs 5 billion to Rs 6 billion. Another amount of Rs 6 Billion will he added in the market today due to FIB maturity and by Thursday Rs 13 Billion will he injected though retirement of Treasury bills.

We believe that since the focus is on credit expansion, in its next auction the SBP is likely to keep the rupee market liquid. The T/Bills auction amount is not likely to exceed Rs 20 billion. But all this does not mean that banks should take speculative short dollar position in forwards unless they have a genuine position. We are sitting at a very dangerous level and we do not suggest going short in forward. Sell/Buy in forward versus forward is preferable.

Our six-month target is 50 paisa premium in a short span of time. Watch out for the spot to break on the downside, which would be first indication of the up move”.

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