Bets on Return of Foreign Money Brighten Outlook for Rupiah

The Indonesian rupiah’s gains against the dollar are quickly evaporating, but markets are now betting on a return of foreign inflows to drive up the currency.

(Bloomberg) — The Indonesian rupiah’s gains against the dollar are quickly evaporating, but markets are now betting on a return of foreign inflows to drive up the currency.

The rupiah is the only Asian currency to advance against the dollar this year, but jitters across emerging markets due to a hawkish Federal Reserve have pushed it near its five-month low. The potential catalysts for a rupiah rally through year-end include a hunt for carry returns by investors and a narrower budget deficit next year.

“Achievement of their fiscal targets can help position the rupiah for stronger gains once the Fed pivots and the US Treasury yields begin to trend downwards,” said Alan Lau, a strategist at Malayan Banking Berhad in Singapore who sees the currency at 14,900 by year-end. 

The rupiah weakened a fifth week to 15,285 a dollar last week, its longest weekly losing streak since June.

Technicals also show some respite for the currency, which is already in oversold territory, according to slow stochastics, a momentum indicator. A looming support level at 15,479, its March 10 low, is also poised to help stem its slide.

The rupiah has slumped about 4% against the greenback since it began its weakening trend in May as a deteriorating Chinese economy added to the risk-off sentiment. The nation’s assets have subsequently been met with tepid demand by overseas investors who have slowed their bond buying and net sold $805 million of domestic equities this quarter, according to data compiled by Bloomberg.

All eyes will now be on Bank Indonesia’s policy meeting on Aug. 24 where it is expected to leave rates unchanged for a seventh straight month, according to a Bloomberg survey of economists. The central bank in its July meeting had said the policy focus is oriented toward strengthening rupiah stability to manage imported inflation.

A new law mandating exporters to repatriate part of their foreign currency-denominated earnings has so far failed to stem the rupiah’s slide, but analysts are bullish on the currency’s prospects and expect the central bank to continue with its interventions to arrest a sharp fall. 

“We’re constructive on the rupiah,” which should trade at 14,900 per dollar by year-end, outperforming Asian peers given its carry appeal, said Adarsh Sinha, co-head of Asia FX and rates strategy at Bank of America. BI also has “credibility in terms of preventing a sharp depreciation of the rupiah,” he said.

Here are the key Asian economic data due this week:

  • Monday, Aug. 21: China 1- and 5-year loan prime rate, New Zealand trade balance, South Korea 20-day imports/exports, Thailand 2Q GDP, Taiwan export orders and BoP current account balance
  • Tuesday, Aug. 22: Indonesian 2Q BoP current account balance, South Korea consumer confidence
  • Wednesday, Aug. 23: New Zealand 2Q retail sales ex-inflation, Japan PMI’s, South Korea business surveys, Taiwan industrial production, Singapore CPI
  • Thursday, Aug. 24: Bank Indonesian rate decision, Bank of Korea rate decision
  • Friday, Aug. 25: Tokyo CPI, Singapore industrial production, Malaysia CPI

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