Nomura tipped Indonesia’s rupiah could fall further, after touching its weakest levels since the late 1990s Asian Financial Crisis earlier this week, as Bank Indonesia’s interventions may be unsustainable amid the broader emerging market selloff.
“We believe Indonesia’s rupiah is vulnerable to the global themes of developed market policy normalisation, broader emerging market stress and China macro/foreign-exchange risks,” Nomura said in a note on Thursday. “We also note that investors are raising concerns about the sustainability of BI’s aggressive actions and intervention, the still-large foreign positioning in Indonesian bonds (US$58.2 billion, or 37.7 percent of outstanding), equities (US$123 billion, or 26.7 percent of market cap) and foreign-exchange hedging/external debt.”
It noted that Bank Indonesia has been buying both the rupiah and bonds, appearing to target flows, the currency and interest rates, which raised the question of the “impossible trinity.” That is an economic truism saying it is impossible for a country to have more than two of a fixed foreign exchange rate, an independent central bank and the free flow of capital.
Nomura said the spot dollar/rupiah was likely to break above 15,000 and move to 15,500 or higher in the near term, noting it entered a long dollar/rupiah trade with a three-month position fixing out on 20 September.
It added that it recently reduced its Indonesian bond position as it appears vulnerable to further risk aversion.
“Given their high reliance on foreign investors, Indonesian bonds are flow-driven products. Ample global liquidity conditions provided a supportive backdrop for investor inflows but as global liquidity conditions tighten, the Indonesian bond market is vulnerable given heavy foreign investor positioning,” Nomura said.
But the investment bank noted that Bank Indonesia does still have more measures it can take to curb rupiah weakness, such as more aggressive rate hikes of 75 basis points or more, or taking a more hawkish bias.
“This would further support monetary policy credibility. However, the risk of such a move is that it would lower growth expectations and likely exacerbate foreign equity outflows,” Nomura said.
Bank Indonesia could also step up issuance of foreign currency debt, which could help counter portfolio outflows, or it could intensify measures to narrow the current account deficit further, it added.
The dollar/rupiah was at 14,880 at 12:33 P.M. SGT, according to DZHI data, off an earlier high of 14,890. Earlier this week, it rose as high as 14,940, its highest since the Asian Financial Crisis.
The dollar/rupiah set an all-time high of 16,650 in June of 1998, according to data from Trading Economics.