Why the Rupiah is Recovering
    Category: Column By : Rainer Michael Preis Read : 879 Date : Monday, May 09, 2016 - 04:44:39

    The Indonesian rupiah is the third best performing Asian currency with year-to-date gain of 7% against the U.S. dollar. It is only outpaced by the Japanese yen’s 10% rise and the Malaysian ringgit’s 11% rise against the greenback. Blessed with globally attractive high interest rates and improving fundamentals, the rupiah has made an impressive comeback.

    Only last year the rupiah touched a 17-year low against the U.S. dollar and the trend was decisively down. When the U.S. dollar was the undisputed king of the 24-hour global foreign exchange market, it looked like things could only get worse for the Indonesian currency and that its down trend would only continue.

    This trend is due to a combination of post-Fed hike U.S. dollar weakness against major currencies with negative interest rates, namely Japanese yen and Euro; and also the bottoming of commodity prices. Thus, the emerging market currencies in general and the Indonesian rupiah in particular are turning the corner from a multiyear downtrend into a sustainable uptrend.

    Attractive fundamentals and high positive carry on Indonesian rupiah assets are the key reasons why the underlying currency market trend has shifted in favor of Indonesia. The U.S. dollar’s three-year advance is generally believed to be coming to an end as central banks recognize a strong U.S. currency is not in the interests of the weak and struggling below trend growth global economy.

    Indonesia’s better-than-expected Q4-2015 GDP growth figures of 5.04% (the fastest in one year) have been the catalyst for the impressive rupiah turnaround. Global investor confidence in the domestic economic fundamentals and the positive impact of “Jokowinomics” are now being manifested in the external value of the currency and inbound capital flows.

    Year-to-date foreign investors have bought net $3.5 billion in Indonesian bonds and $284 million in Indonesian equities. A stable current account deficit of around 2% of GDP based on improved fiscal discipline coupled with year-on-year inflation rate of 4.5% are facilitating these investment inflows.

    A lot of foreign as well as Indonesian capital is parked in low-yielding Singapore dollars due to its perceived safe haven status of a strong currency. Year-to-date however the Singapore dollar has lost 4.2% of its value against the rupiah and the monthly and yearly trend of the Singapore dollar is down against the rupiah.

    Bank Indonesia recently signaled that it might pause its monetary policy easing as it assesses the effects of this year’s interest rate cuts, further strengthening the currency. A policy rate of 6.75% and inflation within the target rate of 3% to 5% could mean that more international banks are becoming positive on the rupiah.

    Evidence that “underweight” emerging market investors have only recently begun to redeploy cash into emerging markets suggests that the emerging market FX rally, while already impressive in 1Q16, will have further room to run. With full year GDP expected to grow by 5.3%, Indonesia and its local currency will be sought after by global investors.