Rupiah Drops Set for Weekly Drop After Funds Cut Asset Holdings

By Yudith Ho and Kyoungwha Kim - May 25, 2012 10:09 AM GMT+0700

 

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 the most since September.

Global funds cut ownership of sovereign debt by 3.22 trillion rupiah ($340 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. Greek Prime Minister Mario Monti said the nation 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 0.4 percent this week to 9,393 per dollar as of 10:04 a.m. in Jakarta , according to prices from local banks compiled by Bloomberg. It rose 0.4 percent today after touching 9,483 the weakest level since December 2009.

One-month implied volatility, which measures exchange-rate swings used to price options, rose 200 basis points today and 400 basis points this week to 14 percent. That was the highest level since Dec. 19.

Currency Forwards

The rupiah’s 12-month non-deliverable forwards declined 2.7 percent, the most since Sept. 14, to 10,363.

“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 benchmark 10-year bonds was little changed today at 6.54 percent, data compiled by Bloomberg show. The yield declined seven basis points, or 0.07 percentage point, 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