1H 2021 Currencies Review: Pakistani Rupee was Outperformed by South Africa’s Rand

The value of Pakistani rupee back then appreciated against the US dollar not quite fundamentally, but due to a purely technical reason, the surplus inflow of foreign currencies from export operations and lending institutions, namely the IMF, World Bank and the Asian Development Bank, which had released over $2.1 billion to Pakistan. The State Bank of Pakistan (SBP) was expected to keep rates unchanged at 7.0% through 2021, down from 13.25% pre-pandemic levels. According to the data, the rupee appreciated around 4% to PKR158.37 against the US dollar since the opening level of January 1, 2021.

Bloomberg data revealed that the Canadian dollar (USD/CAD) took the second position among the top-performing currencies around the world, as it appreciated 1.03% to 1.23 against the US dollar during the period under review.

Canadian currency was followed by the British pound, which gained 0.64% against the U.S. dollar during the same period.

However, many Fx analysts were skeptical about further prospects of Pakistani rupee down the road.

Although the currency demonstrated quite stable performance over the Q2 2021, it was upstaged by the new sovereign frontrunners. To date on an annual basis (July 5, 2020 – July 5, 2021) Pakistani rupee strengthened by 6.8%, whereas Seychelles rupee (USD/SCR) advanced by a whopping 27.3%, followed by South African rand (USD/ZAR) that enjoyed a 20% hike against the greenback over the same period. However, USD/ZAR fell roughly 45% from the October 2008 high to the May 2011 low.

Throughout the COVID-19 pandemic, the ZAR appreciation was predominantly underpinned by external macro factors. The South African economy benefited from a combination of low oil prices against relatively high gold, platinum and materials prices constituting its main exports. Risk sentiment has also played a crucial role in dictating rand trends along with some of its Emerging Market (EM) currency counterparts.

Other EM currencies have also performed strongly but the rand has held the top spot against the dollar for most of 2021 with the Brazilian Real recently taking over.

Bottomline is that the EM currencies appreciation round sends a positive signal to high risk investments implying a possible formation of a new risk-on financial cycle.