Currency Forecast - BDT: Downside To Persist But At A More Measured Pace - AUG 2017

BMI View: Our view on the taka has not changed much since our previous article and we retain a bearish view on the currency in spot terms over the coming months and quarters. However, we expect the taka to depreciate at a more measured pace over the coming months (compared to the year to date) as Bangladesh Bank has put in place new capital controls since April, and this should see the currency outperform the greenback in total return terms. Fundamentally, high structural inflation and an expensive REER are likely to weigh on the currency.

Short-Term Outlook (three-to-six months)

The Bangladeshi taka has fallen by more than 2.8% against the US dollar year-to-date (ytd), and briefly breached BDT83.00/USD in April, before stabilising around the BDT80.60/USD level. This was in line with our view for the currency to face downside pressure against the dollar as real interest differential with the US narrows, while the country's external sector continues to face headwinds. Over the short term, we expect the Bangladeshi taka to continue to weaken against the greenback for the same reasons, but the pace is likely to be more measured, as the Bangladesh Bank (BB) is keen and able to prevent the currency from weakening too much, in order to anchor inflation and instill confidence in the currency. The new capital control in place - where the US dollar exchange rate is capped at inter-bank exchange rate plus BDT2.0/USD - should help to minimise volatility over the coming months, while foreign exchange reserves stood at USD32.5bn at the end of April, which is near record highs. Meanwhile, we note that the increased downside volatility in the currency over the last few months was likely a result of temporary dollar liquidity shortages in the market rather than sudden capital outflows, suggesting only a modest risk of a sudden downside move over the coming months. In total return terms, we expect the Bangladeshi taka to outperform the US dollar.

Further Weakness Ahead
Bangladesh - Exchange Rate, BDT/USD
Source: BMI, Bloomberg

This article is part of our South Asia coverage. To access this article subscribe now or sign up for free trial