More Pain Looms for Indonesian Rupiah on Narrowing Yield Spread

The Indonesian rupiah just had the worst quarter in more than a year, and analysts see more losses ahead.

(Bloomberg) — The Indonesian rupiah just had the worst quarter in more than a year, and analysts see more losses ahead. 

The currency broke the closely watched 15,400 level last week, and there is a possibility it may test this year’s low of 15,638, according to Malayan Banking Berhad. Higher crude prices threaten to worsen the net oil-importing nation’s finances, and that along with higher US yields and a stronger dollar are likely to weigh down the rupiah. 

The rupiah was one of emerging Asia’s worst-performing currencies last quarter even as the central bank sold new bonds to lure foreign inflows. The spread between Indonesia’s 10-year bonds and similar-maturity US securities is holding near this year’s low, threatening to spur more outflows from local notes. 

“As a net importer of crude, higher oil prices feed into a deterioration of the current account balance,” said Nicholas Chia, Singapore-based macro strategist at Standard Chartered Bank. “Narrowing rate differentials may fuel more capital outflows, particularly as BI stands pat for the rest of the year while there remains a lingering risk of one more hike by the Fed in the fourth quarter.”

The spread has shrunk on growing wagers the Fed may keep interest rates higher for longer. The differential between the nation’s 10-year yields has narrowed to about 2.30% from this year’s high of around 3.40% reached in March. This has reduced the allure of Indonesian debt and spurred $778 million of outflows last quarter. 

The rupiah fell 3% in the three months ended September, the biggest decline since the period ended June 2022. Bank Indonesia even introduced new bonds, known as SRBI, but they haven’t yet proved very effective in curbing the currency’s losses. 

Despite the central bank raising 24.5 trillion rupiah ($1.6 billion) in the debut sale of its new rupiah-denominated securities in recent weeks, the scurrency still fell 1.5% in September. 

That doesn’t mean it’s going to be a one-way path, though. Maybank’s FX strategist Alan Lau expects US yields and the dollar to retrace by December, which may bring some relief for the rupiah. The currency rose 0.4% to 15,455 per dollar on Friday. 

Traders will look forward to inflation data due Monday for cues on the path of monetary policy. Meanwhile, the surge in US Treasury yields is spooking investors and threatens to weigh on emerging market assets.   

“The rupiah is likely to be on the back foot, just like most Asian peers,” said Nicholas Mapa, an economist at ING Groep NV. “At this stage, much still depends on where the Fed will go as this will be impacting sentiment. Thus our calls will be very contingent on Fed policy but until the narrative changes most Asian FX will be under pressure.”

Here are the key Asian economic data due this week:

  • Monday, Oct. 2: Japan 3Q Tankan survey, Indonesia CPI
  • Tuesday, Oct. 3: RBA interest rate decision and Australia home loans, New Zealand house prices
  • Wednesday, Oct. 4: RBNZ interest rate decision, South Korea industrial production
  • Thursday, Oct. 5: Australia trade balance, South Korea CPI, Taiwan CPI and PPI, Philippines CPI, Singapore retail sales, Thailand CPI
  • Friday, Oct. 6: Japan labor cash earnings, RBI interest rate decision

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