What made Rupiah’s weakened during the past weeks?
Fluctuations in the rupiah were congruent with the shifts in other regional currencies, as rupiah depreciated amidst external and domestic sentiment (see table of the week).
Rebalancing effect. There is a rebalancing effect from US dollar strengthening relative to emerging countries’ currencies, against the backdrop of improving economic data in US and indicative economic downswing in China and Russia.
BI policies. Under the new leadership, Bank Indonesia (BI) has become more tolerant towards IDR depreciation. During annual dbAccess Indonesia Conference 2014, Bank Indonesia’s deputy governor said that the central bank now prefers a stable-to-weak rupiah as opposed to previous policies that led to a stable-to-strong currency. The new direction, intended partly to nurture export and also to preserve foreign reserves, has resulted in lesser BI intervention in the FX market.
USD illiquidity. The weakening of the IDR, driven by bonds and equity outflow, is exacerbated by current USD illiquidity in our system. As USD supply is thin, the sudden demand spike is significantly putting pressure on the IDR – similar to the case of illiquid stocks being sold on thin volume.
Foreign Funds outflow. As of 18 Dec 2014, we have seen IDR29.9T (month to date) foreign outflow in capital market, where is IDR22.9T coming from Government Bonds and IDR7.0T coming from Equity side. The huge outflow induced by a potential Fed rate hike next year has put pressure on the IDR and other emerging market currencies
What is IDR Scenario in The Week Ahead?
Although we acknowledge that the IDR may be under pressure in the near term, we believe there are several reasons that will reinforce IDR strengthening
· Improving trade numbers. As a net oil importer, the decline in oil prices should significantly reduce nominal oil imports. This numbers will be released next week.
· Fixed-oil price subsidy. The fuel price hike and the upcoming fixed subsidy/liter shall potentially reduce the fixed subsidy significantly and improve the budget posture. Furthermore, these initiatives may reduce fiscal deficit over time.
· Undervalued currency. DB’s FX Strategist believes that the recent IDR weakness may be attributable to BI’s latest regulation that requires non-bank corporates to hedge their FX debts (20%) and have at least 50% FX assets of their FX liabilities starting from Jan’15. Assuming that USD23bn FX debt matures over the next six months, she believes that these initiatives will translate into c.USD2bn of additional FX demand in Dec’14. This is on top of the seasonal debt repayment and dividend repatriation in 4Q translated into a temporarily undervalued rupiah. Moving forward, Bank Indonesia will continue to maintain rupiah stability in accordance with its fundamental value.
· Easing political tensions. The recent dynamics dispel the notion of a cohesive cabinet trying to act as a roadblock for Jokowi’s government. Most notably is the recent division within Golkar (16%), and with Demokrat (11%) and PAN (7%) agreeing to support Jokowi coalition in maintaining regional direct election.
· Fixed-oil price subsidy. The ministry of finance, Bambang Brodjonegoro, stated that the government will implement the fixed subsidy scheme starting January 2015. This is very positive as it will mitigate the risk of fuel price volatility and put a much better certainty to government budget subsidies in the future and reduce risk of social discontent when fuel price go up.
· FOMC decision. Based on FOMC current assessment, the Committee judged that it can be patient in beginning to normalize the stance of monetary policy. It likely will be appropriate to maintain current rate for a considerable time especially if projected inflation continues to run below the committee’s 2% longer-run goal.
· US Housing sales (-1.6% vs cons 3.1%) lagged expectations.
· Fed policy is more hawkish. The FOMC changed its phrase about maintaining the Federal Funds Rate near zero “for a considerable period” into the more hawkish statement that “it can be patient in beginning to normalize the stance of monetary policy”
Source By : Investment Team BNI-AM