Rupiah Forwards Surge Most in Three Years on Exports Outlook
Comment of the Day

September 09 2013

Commentary by Eoin Treacy

Rupiah Forwards Surge Most in Three Years on Exports Outlook

This article by Yudith Ho for Bloomberg may be of interest to subscribers. Here is a section
Foreign-exchange reserves increased last month for the first time since April to $93 billion, from $92.7 billion in July, Bank Indonesia said Sept. 6. The central bank began holding weekly foreign-currency swap auctions on July 25 .

“The reserves were helped by $3.9 billion accepted by Bank Indonesia by offering foreign-exchange swaps, but those may weigh on the reserves when they come due in the next few months,” said David Sumual, Jakarta-based chief economist at PT Bank Central Asia, Indonesia's largest lender by market value.

The rupiah has dropped 11 percent this quarter, the worst performance among 24 emerging-market currencies tracked by Bloomberg. A decline of 10 percent adds as much as 0.8 percent to inflation, according to Bank Central Asia, which revised its year-end forecast for consumer-price gains to 9.4 percent from 8.3 percent.

“Many industry associations haven't increased prices in response to the rupiah yet,” BCA's Sumual said. “So we may see that contribute to inflation in September or October.”

Eoin Treacy's view The weakness of Asian and other emerging market currencies and how this was reflecting on their respective stock markets has been a topic of conversation at Fullermoney for a number of months. Over the last decade foreign investors have enjoyed concurrent capital market and currency appreciation by investing in Asia. When currency weakness began to take a toll on total returns, some investors withdrew funds until they had greater visibility on the outlook for the performance of regional currencies. This contributed to heightened volatility on both currency and stock market returns over the last few months.

Since the Indian Rupee has fallen most against the Dollar, it is notable that its climactic activity nearly two weeks ago has been a lead indicator for the region. Other regional currencies now appear likely to at least unwind short-term oversold conditions following today's upward dynamics. Here are some of the relevant charts Indonesian Rupiah and JCI, Indian Rupee and Nifty 50, Thai Baht and SET Index, Malaysian Ringgit and KLCI.

From a medium-term perspective, while there is scope for an additional rally considering the depth of the recent declines, the most likely scenario over the next few months is for some additional ranging in order to build support. (Also see Comment of the Day on September 5th)

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