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Rupiah may not remain strong for long
Analysts have said that the rupiahâs recent appreciation may be short-lived, while Bank Indonesia (BI) is also expected to take action against the overstrengthening of the currency, which could pose risks to Indonesiaâs trade competitiveness
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nalysts have said that the rupiah's recent appreciation may be short-lived, while Bank Indonesia (BI) is also expected to take action against the overstrengthening of the currency, which could pose risks to Indonesia's trade competitiveness.
A rupiah rate of 12,850 per US dollar will provide an opportunity for investors to buy greenbacks before the rupiah depreciates again on the risk of slowing portfolio flows into Indonesia and the swelling current-account deficit, according to Irene Cheung, a senior foreign exchange strategist with ANZ Bank.
She forecasted the currency to weaken to 13,600 per dollar by the end of this year, arguing that the central bank would opt for an 'undervaluation' strategy aimed at preserving economic stability.
'We continue to believe that the Indonesian rupiah needs to weaken further to address the current-account deficit,' she commented.
'A more competitive currency will not only boost exports but also dampen imports to help reduce the external deficit.'
The rupiah has strengthened for five consecutive weeks, the longest rally this year, over expectations that the latest string of trade surpluses would significantly improve Indonesia's current-account deficit.
Bloomberg currency rates show that the rupiah closed at 12,855 per US dollar on Friday, with the Indonesian currency rallying 2.7 percent over the past five weeks.
The rupiah's rise followed news that Indonesia recorded a US$2.5 billion trade surplus from January to March, the biggest quarterly surplus in three years.
BI has estimated that the hefty trade surplus could push down the current-account deficit ' a major concern among investors ' to 1.6 percent of gross domestic product (GDP) in the first quarter, from 2.8 percent in the last three months of 2014.
'We believe that this euphoria, buoyed by the record trade surplus in March, could be short-lived,' Maybank analysts led by Saktiandi Supaat wrote in a research note.
Saktiandi pointed to the fact that Indonesia, despite posting a trade surplus, was in fact witnessing steep contraction in the growth of its exports and imports, both of which have contracted for six straight months, falling by 9.7 percent and 13.4 percent, respectively, in March.
'The weak export and import prints suggest that economic growth could remain anemic,' he noted.
Last week, almost all Asian currencies rose against the dollar on weak US economic data, with the latest data releases on retail sales, manufacturing and jobless claims in the world's biggest economy all falling short of economists' estimates.
The rupiah's 0.5 percent advance against the US dollar was matched by a 0.5 percent strengthening in the Thai baht and a 0.4 percent appreciation in the Philippine peso, and dwarfed by gains of 1.2 percent in the Japanese yen and the Malaysian ringgit and 1.9 percent in the Singapore dollar.
In the medium-term, however, the risks from broad-based dollar appreciation will remain, as a potential hike in the US interest rate will boost the global demand for dollars, Mandiri Sekuritas analysts led by Aldian Taloputra wrote in a research note.
'Forex reserve cost to defend the rupiah is high and therefore it is unsustainable if continuously implemented without deepening of the currently thin forex market,' said Aldian, who predicted the rupiah to weaken to 13,300 per dollar this year.
