Foreign Currency

Rupiah at Four-Year Low Triggers Intervention, Rate Hike Talk

(Bloomberg) — Bank Indonesia intervened in the currency market to steady the rupiah after it fell to a four-year low amid a broad dollar rebound and heavy bond outflows.

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The currency pared its losses to about 0.1% against the greenback as of 1:00 p.m. on Tuesday local time. It had slipped almost 0.5% in morning trading to 15,963 per dollar, the lowest since April 2020. Global funds withdrew some $1.7 billion from Indonesian bonds in the first quarter, the most since the three-months through September 2022.

The rupiah was heavily impacted by the yuan’s depreciation, as well as strong dollar demand for dividend repatriation and foreign outflows in the bond market, said Bank Indonesia executive director for monetary and security asset management Edi Susianto. Above-expectation March inflation data, spurred by stubbornly high food costs, also contributed to the currency’s weakness, he said.

Among traders there have been growing concerns that President-elect Prabowo Subianto’s vast spending plans could burden the Southeast Asian country’s budget. A $29-billion free lunch and milk program for school children is expected to bloat Indonesia’s budget deficit and endanger its prized investment-grade credit ratings.

Investors will also be keeping a close eye on the nation’s first-quarter current account deficit, which widened by $1.3 billion in the final three months of last year. Indonesia’s trade surplus in February narrowed to the smallest in nine months to $867 million amid a slump in commodity exports.

If the rupiah stays around the 16,000 psychological level in the near-term, Bank Indonesia may consider raising its benchmark interest rate by a quarter-point to 6.25% at its April 24 meeting, said Brian Tan, economist at Barclays Plc, adding that an off-cycle move is unlikely but “not impossible.” The central bank delivered a shock rate hike last October after an extended bout of currency weakness.

“We believe a rate hike is not out of the question for BI,” Tan said. “We have not sensed that the central bank is particularly worried about economic activity or sees an urgent need to cut rates.”

Dollar Pressure

Asian currencies came under pressure in March, pushing a Bloomberg gauge of the region to the lowest since November. The dollar pushed higher on bets the Federal Reserve will keep its policy rate higher for longer and not cut it any time soon.

“Sentiment toward Asian foreign-exchange including the rupiah has been weighed down by concerns related to the Fed possibly slowing down easing this year given strong US data,” said Alan Lau, a foreign-exchange strategist at Maybank in Singapore. “However, we stay wary of further weakness given that the dollar is stretched and the possibility that Fed officials could still reiterate the possibility of cuts this year.”

Stocks fell on Tuesday as well, with the Jakarta Composite Index sliding to the lowest since January.

Bank Indonesia’s Susianto is optimistic that the pressure on the rupiah remains manageable and temporary, especially as exporters continue to supply enough foreign exchange into the market. The central bank also is also ready to intervene in the bond market depending on developments, he said.

Common Theme

The rupiah’s decline and the central bank’s official support for the currency is in line with a common theme in Asia at the moment. Japan’s currency chief has delivered his most robust warning on the yen in months, while Chinese authorities have been bolstering the yuan with their daily reference rate.

(Corrects a currency ticker in a web headline.)

Bank Indonesia Governor Perry Warjiyo has repeatedly said this year that currency interventions and the sale of high-yielding securities will be their main levers to underpin the rupiah. The central bank kept the key rate at 6% for five straight months, with Warjiyo signaling that it will stay at that level at least until mid-year.

“We suspect another heavy FX intervention may be coming in what will be a seasonally weak period for the rupiah ahead,” said Satria Sambijantoro, an economist at PT Bahana Sekuritas. “Bound by its dovish guidance, BI faces an uphill battle to defend the rupiah as it will have less flexibility and credibility when looking to hammer FX speculators.”

–With assistance from John Cheng, Ruth Carson, Marcus Wong and Grace Sihombing.

(Updates with central bank intervention, fiscal risks)

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