Strategy - rupiah strengthening or US$ weakening? - CLSA

We continue to be bullish on the Indonesian rupiah and bearish on the dollar. Interesting to note EUR and Asian currencies gained ground despite Middle Eastern tensions. Rupiah also gained on the back of recent correction in both equities and fixed income market, first time we have seen in many years. In today’s strategy note, Nick Cashmore points out that despite recent strength, rupiah is still one of Asia's weakest currencies in the past decade

Rupiah has been pretty much flat from where it was a decade ago, whereas fundamentals of the economy has improved tremendously. Since 2001, the economy has grown fivefold and public debt to GDP has dropped to 26%.

But we think this is about to change. There are several reasons:

The central bank’s aggressive negative carry trade is ultimately unsustainable enabling market forces greater control over the rupiah’s direction.
With inflation the primary present concern, there is plenty of flexibility to allow the rupiah to mitigate this pressure.
Now that China has begun raising benchmark interest rates while it has allowed the yuan to appreciate, other Asian countries will have more room to continue their policy

We would also like to add that the massive dollar dilution program finally seems to be working! Dollar is now weakening with fund flows heading towards back the US and geopolitical mess in the Middle East which normally being seen as dollar positive. Safe haven status is seriously challenged.

Gold now flirting with US$1,400 level once again and silver at record high. Could this underscore fundamentals weakness of the US$?

Stronger rupiah will support rate sensitive and domestic demand stocks, which are now more attractive after the recent correction. Remain OWT.