Outflows drag rupiah to 4-year low

SINGAPORE: The Indonesian rupiah hit a four-year low on Wednesday and looked set to break the psychologically important 11,000 per dollar support line as emerging markets suffered further outflows on fears that the Federal Reserve will soon begin to pare back stimulus.

Spot rupiah fell as much as 0.9% to 10,780 per dollar, its weakest since April 2009, and forwards markets pointed to further declines for what is already the second-worst performing emerging market currency in Asia.

One-month non-deliverable forwards weakened to as low as 11,350.

The Indonesian rupiah, along with the Indian rupee, are seen as the most vulnerable to the Fed’s withdrawal of monetary stimulus due to widening current account deficits, slowing economic growth and strong resistance to enacting much-needed reforms.

The Indonesian currency has lost 10.7% so far this year, according to Thomson Reuters data.

Jakarta stocks snapped a four-day plunge which took them into bear market territory. By late afternoon the benchmark index was up 1.2% after Indonesia’s president said the government would announce a policy package on Friday to combat growing inflation and job losses.

But traders and analysts said the plan may not provide much respite for the rupiah.

“The policy package could be something to boost growth in the near-term, but the real problem with Indonesia is rather structural, which is not going to be easy to solve with touch-up measures,” said Gundy Cahyadi, an economist at OCBC Bank in Singapore.

“The pressure on the rupiah may persist as long as sentiment on the economy remains weak, but more importantly we would also

The rupiah is expected to soon test 11,000 after weakening past a chart support area around 10,650-10,700, traders and analysts said. The next key point would be 11,017, which would mark the 61.8% Fibonacci retracement of its appreciation between 2008 and 2011.

One trader said some banks had placed dollar bids at much higher than interbank levels and some had already traded above 11,000.

Meanwhile investors continued to dump government bonds.

The five-year government bond yield rose to 7.800% and the 10-year yield advanced to 8.563%. Both were highest since March 2011.

UBS Wealth Management’s regional chief investment officer Kelvin Tay said rising interest rates would add to strains on Southeast Asia’s largest economy. Last month, Indonesia’s central bank cut its 2013 growth forecast to 5.8-6.2% from 6.2-6.6%.

OUTFLOWS

The foreign exodus has intensified since late last week after the central bank kept interest rates unchanged despite surging prices and as data showed the current account deficit widened more than expected.

Foreign investors sold a combined net 4.6 trillion Indonesian rupiah (US$430.5mil) in stocks from Friday to Tuesday. During the period, the Jakarta shares lost nearly 11 percent, erasing all of their 2013 gains.

“I don’t think it matters so much,” said Sean Yokota, head of Asia strategy at Scandinavian bank SEB in Singapore, referring to whether a rebound in stocks would have a positive impact on the rupiah.

“Investors are waiting for the Fed minutes tonight and the risk of more certainty towards September tapering. That will drive the rupiah more than what stocks are doing,” he added.

Indonesian authorities have tried to support the rupiah by providing dollar liquidity. While such moves could blunt pressure on the currency temporarily, and smooth out volatility, few analysts and traders believe authorities can reverse the downtrend any time soon.

Foreign exchange reserves in July fell to the lowest since October 2010, indicating the central bank is running out of ammunition to defend the rupiah.

The dollar also looks set to rise against most other currencies well into next year, according to a recent Reuters poll, reflecting the global shift from emerging markets as the world’s largest economy picks up – Reuters

Outflows drag rupiah to 4-year low