The forex traders in Pakistan are becoming more and more convinced that political uncertainty is the major cause of the rupee volatility, and not necessarily economic fundamentals. In the busy Karachi and Lahore trading rooms, discussions usually revolve around the impact of changing alliances, protests and policy changes on currency sentiment. Traders claim that no significant political development in the recent times has taken place without ramifications to the exchange market, be it an election, a government reshuff, or a cabinet feud. In their opinion, the value of the rupee is currently responding more to political headlines rather than to real trade data or changes in the monetary policy.
The market players observe that speculation has been heightened each time the topic of instability arises within the government is being talked about. Every rumor about the change in leadership or postponing of reform programs will incriminate knee-jerk effects in the forex market. This ambiguity will deter foreign investment and force local companies to aggressively hedge their position, and this factor adds to short-term fluctuations. The absence of consistent policy in economic practices is the biggest concern raised by many forex traders who found that it is hard to achieve currency stability over a long period when the political continuity was not maintained.
Other commentators claim that the turns of the rupee also reflect the lack of confidence of people in economic governance. The issue of political battles among parties has usually slowed down important fiscal policies such as resolutions on subsidies, tax, and foreign debt. These changes have left traders unsure about what to expect from policy, moving them toward speculation rather than relying on signals from the market. Moreover, the widening gulf between the stated and open-market exchange rates only complicates things further as the traders try to expect the possibility of a government intervention.
A senior forex broker in Karachi pointed out that during times of political turbulence, such events often coincide with heightened volatility. Another forex broker added that foreign reserves tend to decline more rapidly during elections or policy stalemates as import bills rise and foreign lenders reduce their inflows. This kind of situation puts added strain on the rupee and puts it at risk of speculative attacks. While some investors would typically hold their positions with a long-term view, many traders focus on making short-term cash profits. The focus on short-term profits, while reasonable under the circumstances, would only serve to add to the volatility.
International influences are also a factor, although traders insist that their impacts are enhanced by local politics. As an example, the variation in the oil prices or alterations in the U.S. monetary policy would typically result in a minimal movement in the exchange rate. However, in the politically charged situation in Pakistan these factors tend to increase swings due to the already weak investor sentiment. The volatility thus generated destroys confidence between importers and exporters since they can hardly plan ahead due to the continuous exchange rate changes.
Nevertheless, there are forex traders who believe that the market would stabilize provided there is political clarity. They contend that regular dialogue between the policymakers, central bank and the financial institutions would be a way back. Openness in financial affairs and plausible undertakings in structural adjustments are perceived as the necessary steps in pacifying the market. Until these steps are entrenched, most traders feel that the rupee will be vulnerable to any change in the political situation where speculation and uncertainty remains the order of the day.
