FX Primus Ltd.

FX Primus Ltd.

September 02, 2013 05:43 ET

FXPRIMUS ASEAN Market Review: Bank of Indonesia Will Do Whatever It Takes to Preserve Rupiah. Will It Be Enough?

SINGAPORE, SINGAPORE--(Marketwired - Sept. 2, 2013) - In FXPRIMUS' ASEAN Market Review for 30 August, the brokerage firm's Senior Economist, Jimmy Zhu, looks at Indonesia's interest rate hike.

Economic Insights

Indonesia's central bank unexpectedly raises policy rate to 7%

The Bank of Indonesia joined the "rate hikes party" in emerging economies by raising both its main policy rate and Fasilitas Simpanan Bank Indonesia (FASBI). The benchmark policy rate unexpectedly rose another 50bps to 7% yesterday, the highest level in the past four years.

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The action of the Bank of Indonesia looks very similar to Brazil's, aiming to curb inflation and capital outflow. The question now is whether bold policy is sufficient to stabilize the depreciating Rupiah.

The U.S. announced a better-than-expected Gross Domestic Product (GDP) overnight, with the 2Q annualized growth rate reported at 2.5%. Together with 2013 economic data so far, it puts Quantitative Easing (QE) tapering on the table as soon as 20 days from now. In this scenario, rate hikes are far from sufficient to curb capital outflow when the overall economy looks depressing with lower growth and higher inflation. The latest inflation in Indonesia rose to 8.61% YoY, the highest in the past four years.

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The Rupiah surged yesterday, reacting to the Bank of Indonesia's monetary policy to stabilize the capital market. However, recent currency volatility in emerging markets (EM), spreading from India to Indonesia, just implies that more needs to be done. Yesterday, the central bank also reduced the holding period for its State Bank of India (SBI) debt certificates to 1-month from the previous 6-months, bringing funds to other instruments. Besides that, its 2-year swap is due tomorrow and its contract with Japan will be renewed as well.

Currency Insights

Strategy of buying USDIDR on dips remains

Whatever Indonesia's central bank does to curb currency depreciation, it just doesn't look like it's enough. The direction will still be from the Federal Reserve (Fed). With that said, the rising economic condition in the U.S. puts extra pressure on many EM currencies. It now seems inevitable that emerging market (EM) countries will suffer the most. Hot money lifted their equities more than 150%, from the lowest level in 2009 to a peak in 2011. But many of these funds did not really understand the fundamentals of the economies behind them. This means they are highly speculative and are only parking for a limited period, as long as policies remain unchanged.

China's growth is set to decelerate and their mega stimulus package may no longer be available as the new leadership no longer seeks to implement a massive stimulus package, Relatively poor policy response from many emerging market countries failed to counter the negative impact of the U.S. stimulus withdrawal. With no catalyst to support those emerging markets, we expect their currencies to underperform for a prolonged period.

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Thus, our view on the Rupiah remains bearish and we continue seeking selling opportunities on the Rupiah when it rebounds, since the current Fed Quantitative Easing (QE) tapering momentum doesn't support further appreciation for ASEAN currencies The USDIDR pair may gain some support near the level of 10560, the 50% Fibo level from 2008 to 2011, while the level of 11760 forms some resistance here.

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