T

he rupiah this week was on a bullish track with the US central bank expected to continue its monetary stimulus, coupled with prevailing optimism that improvement in Indonesia'€™s economic data would be sustained in the coming months.

The rupiah'€™s one-month non-deliverable forwards (NDF) '€” a Singapore-based rate that is reflective of the currency'€™s future value '€” touched 10,875 per US dollar on Friday, the strongest level in almost a month, before closing at 10,980.

The forwards were traded at 3 percent stronger in the spot rate, which advanced 0.5 percent this week to 11,310 per dollar, according to Bloomberg.

'€œThe demand and supply of foreign exchange [forex] has become more efficient, which is reflected by the fact that our NDF has been lower than our spot rate,'€ Bank Indonesia (BI) Governor Agus Martowardojo said on Friday.

Throughout the year, the NDF rate for the rupiah has always been traded higher than its spot rate, with the Singapore-based rupiah rate traded as much as 6.6 percent weaker compared to the onshore rate in August.

'€œThe fact that our NDF was weaker than our spot rate four months ago showed there used to be demand for forex that could not be fulfilled,'€ the BI governor explained. '€œAt the moment, our forex market is in better shape, with the currency already trading at a fair level that is reflective of our economic fundamentals.'€

The rupiah has been Asia'€™s worst-performing currency this year, having depreciated by as much as 16 percent, as the currency was hit by Indonesia'€™s high current account deficit, coupled with capital outflows stemming from the prospect of a tighter US monetary policy.

In the future, however, the rupiah would be supported by the fact that Indonesia'€™s current account deficit would narrow at 3.3-3.5 percent of gross domestic product (GDP) throughout this year, before falling further to below 3 percent in 2014, Agus predicted.

On the external front, the Federal Reserve is predicted to maintain its monetary stimulus and keep interest rates low to support its economy, after a 16-day shutdown in the US economy is predicted to trim the country'€™s GDP growth
significantly.

An extension of the US monetary stimulus, also known as quantitative easing, would pump inflows into emerging market economies. It would also weaken the dollar, making currencies in the emerging market relatively stronger when traded against the greenback.

Analysts say a stronger currency will invite inflows to rupiah-denominated assets, particularly government bonds, which have been the worst-performing debt papers in Asia as a bearish rupiah performance eroded returns for rupiah bondholders.

Indonesia'€™s benchmark 10-year bonds have rallied on the back of a stronger rupiah. The yield for the government debt paper maturing in May 2023 dropped 52 basis points this week to 7.45 percent, the lowest in three months, according to the Inter Dealer Market Association.

The significant drop in yields for rupiah bonds reflected a '€œstabilization'€ trend in the local financial market due to returning fund inflows, Finance Minister Chatib Basri said on Friday, noting the yield for the 10-year government bonds stood at 8.9 percent only weeks ago.

'€œRupiah assets should be more attractive compared to dollar assets'€ over the upcoming months, as the US monetary stance would stay loose while the greenback was expected to stay weak, said Mika Martumpal, a currency analyst with Bank CIMB Niaga.

The rupiah could touch 10,500 per dollar by the end of 2013 as high dollar demand for companies'€™ repatriation and debt payments eases, coupled with improvements in Indonesia'€™s macroeconomic indicators, he predicted.