Dollar Scarcity: Real Squeeze or Tactical Play?

Tresmark: With dollars becoming harder to find, there’s a visible anxiety in the currency markets. Yesterday, while the interbank closed at 283.70—its highest since December 2023—importers were being quoted at 284.25–284.50, and open market selling rates hovered around 285.70. Interestingly, banks are offering 1–2 rupees higher rates on remittances in a rush to post higher remittance numbers.

So, should the market be worried? Not quite. Here’s why:
– Reserves are rising, not falling. We’ve gone from $8.8bn in June 2023 to $17bn+ today—a near doubling.
– Eurobonds and CDS have firmed up. Yields are up 90 bps this quarter, signaling improved credit sentiment.
– REER stands at 97.8, pointing to an undervalued Rupee. (For context, India’s REER is at 98.57). Ideally, we’d like to keep it near 95 to maintain export competitiveness.
– Current Account is projected to post a surplus this fiscal.

So Where Are the Dollars?
SBP is actively buying from the market to shore up reserves ahead of IMF targets. Pakistan expects $3.4bn in inflows this month, which will push country reserves past $20bn. Traders are of the view that the markets is short by around $300-400mn to make the liquidity just comfortable.

The other reason is, of course, the Iran Israel conflict and an uneasiness of this could spiral in to a long term conflict. Last, those exporters to who can hold on to their proceeds are delaying their payments to take advantage of any Rupee weakness.

Currency Outlook
We don’t believe the government will allow a material depreciation—it’s too politically sensitive and inflationary. Rupee will likely stabilize around 285 next month.

The budget midpoint is based on 290/$, giving us an informal band of 283–297. Where as some rating agencies are projecting 298–305 by mid-2025.

At any rate, a Rs.1.5/$ depreciation every month is pretty much acceptable (translating to long term average depreciation of 6.2%).

Oil & Iran-Israel Fallout
“We live in a world where Middle East oil is a lot less relevant to the U.S.,” said Ali Meli, chief investment officer and managing partner at Monachil Capital Partners. Unlike in the past, when extreme oil-price shocks hobbled the U.S. economy, Meli pointed to the “shale revolution” of recent decades that has made America a de facto net exporter of oil. At the same time OPEC has also increased output. Some analysts are looking at a conservative top of $83 per barrel. This is material, but not substantial and can be absorbed unless it is at these levels for protracted times. At these levels, the incremental impact on import bill would be $400mn (annually) and inflation impact would be about 2%.