Bloomberg News

Rupiah Set for Weekly Decline After Funds Reduce Asset Holdings

May 25, 2012

Indonesia’s rupiah headed for a second weekly drop after overseas investors reduced holdings of the nation’s assets. The currency’s non-deliverable forwards dropped to the lowest level since October 2009.

Global funds cut ownership of sovereign debt by 3.22 trillion rupiah ($347 million) this month through May 21, poised for the biggest monthly outflows since February, finance ministry data show. They sold $527 million more local stocks than they bought in May until yesterday, according to exchange data. Italian Prime Minister Mario Monti said Greece is likely to stay in the euro area after European leaders disagreed over joint bond sales at a May 23 summit.

“The rupiah will continue to underperform as capital outflows reflect global risk aversion,” said Gundy Cahyadi, a Singapore-based economist at Oversea-Chinese Banking Corp. “Bank Indonesia is trying to smooth out volatility in the rupiah, but as it is, the market isn’t functioning perfectly since it is driven by fear.”

The rupiah fell 0.2 percent this week to 9,371 per dollar as of 4:33 p.m. in Jakarta, according to prices from local banks compiled by Bloomberg. It gained 0.6 percent today and touched 9,495, the weakest level since December 2009.

One-month implied volatility, which measures exchange-rate swings used to price options, rose 450 basis points today and 650 basis points this week to 16.5 percent. That was the highest level since Oct. 6.

Currency Forwards

The rupiah’s 12-month non-deliverable forwards declined 1.8 percent to 10,280 per dollar after reaching 10,435 earlier.

“There’s less liquidity in the spot market so people are having a hard time trading, and the NDF market is expressing its own views on the rupiah,” said Sean Yokota, a currency strategist at UBS AG in Singapore. “Foreigners own about 30 percent of the bond market, and if Europe’s situation worsens, some of the funds may have to sell off some Indonesian bonds.”

Bank Indonesia continues to enter the foreign-exchange market and will use its “ammunition” carefully, Deputy Governor Hartadi Sarwono said on May 16. The monetary authority doesn’t want the rupiah to weaken too fast, Sarwono said.

“The rupiah should hold up fairly well due to strong underlying fundamentals in this current environment,” strategists at Brown Brothers Harriman & Co. led by Marc Chandler wrote in a report yesterday. “Bank Indonesia remains committed to defending the rupiah from depreciation pressures and has a preference towards a stronger currency.”

The yield on the government’s 7 percent bonds due May 2022 rose four basis points, or 0.04 percentage point, today to 6.54 percent, according to closing prices from the Inter Dealer Market Association. The yield declined seven basis points this week.

To contact the reporter on this story: Yudith Ho in Jakarta at yho35@bloomberg.net. Kyoungwha Kim in Singapore at kkim19@bloomberg.net

To contact the editor responsible for this story: Ven Ram at vram1@bloomberg.net


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