Pakistan's rupee
Pakistan's rupee strengthens to seven-week high on slowing inflation. Reuters

The Pakistani rupee has strengthened to a seven-week high on Friday, moving off a seven-month low and ignoring a broadly strong dollar, as data showed that inflation has slowed to a 17-month low in the South Asian country.

Pakistan's share market too rallied on the comfort from easing price pressures. The benchmark KSE-100 share index rallied 1.9% since the data to end Friday's deal at a record high of 30, 940.

In a country of persistent trade deficit because of its huge oil import bill, the recent big drop in international crude prices should be a good news and the October inflation data came on 5 November can be a proof of the same.

Pakistan's annual inflation rate slowed to 5.8% in October compared to 7.7% in September, dragged mainly by lower food, oil and gas prices.

While energy, food and related sectors showed easing price pressures, sectors like furnishing, household equipment maintenance and hotel and restaurants saw upward pressures, revealing better demand outlook in the economy.

Strong Dollar Impact

The USD index, the gauge that measures the strength of the greenback against a trade-weighted basket of major currencies, has risen above 88 mark for the first time since June 2010, of late boosted by a stronger than expected weekly employment data.

The sharp dollar rally has broadly hurt most of major and emerging market currencies, given the hopes of a Fed rate hike as soon as the first quarter of 2015, thanks to the continuing positive data surprises from the US.

However, like many Asian currencies, the Pakistani rupee may also see a part of the negative impact due to tighter dollar being offset by easier policies in Eurozone and Japan.

Trade Scenario

Pakistan's trade scenario is precarious but the slide in oil prices may help bring some improvement in the coming months. It has recorded a trade deficit of around $2.3bn in October.

The fact that exports have fallen 4.3% while imports surged 17.9% year over year in the month reveals the overall weakness of Pakistan's trade environment.

Technical Analysis

The Pakistani rupee has weakened more than 33% from the 16-month high of 95.76 touched in April over the past seven months, and therefore the 1.2% rally from last week's low to this week's strongest level need not make big headlines.

However, the gain in the South Asian currency against the current of a rallying greenback is noteworthy for that reason and so are the technical levels.

The USD/PKR pair had rallied past the 50% Fibonacci retracement of its December 2013-April 2014 selloff in August itself but was struggling to make decisive move upwards.

The fall in the pair this week has took it back to the 50% line and now the immediate support seen on the weekly chart is the 101.0-100.70 region ahead of 100-99.65. The next level south is the 23.6% level of 98.75 and then comes the April low of 95.76.

On the higher side, the pair will look at 103.30-104.0, coinciding the the 61.8% line. A break of that will open doors to 105.10-105.90.

Pakistan's rupee moves off 17-week low to 7-week high IBTimes UK/FXStreet