Offshore investors reduced government debt holdings by 4.5 trillion rupiah ($476 million) this month through May 29 and sold $707 million more local stocks than they bought until yesterday, finance ministry and exchange data show. Bank Indonesia will begin offering dollar term deposits, then sell foreign currency to the spot market or use swap instruments, it said in a statement today.
“The potential for the rupiah to weaken further is great due to tight dollar liquidity and the European crisis,” said Billie Fuliangsahar, director of treasury at PT Rabobank International Indonesia in Jakarta. “I expect overseas investors to return to local financial markets by the end of June at the earliest.”
The rupiah weakened 2.7 percent this month to 9,437 per dollar as of 4:24 p.m. in Jakarta, according to prices from local banks compiled by Bloomberg. The currency earlier touched 9,643, the weakest level since October 2009, and was little changed today.
One-month implied volatility, which measures exchange-rate swings used to price options, rose 12 percentage points in May to 17.5 percent. That’s the biggest climb since October 2008. The measure was unchanged today. Goldman Sachs Group Inc. cut its rupiah forecast to 9,800 for three months from 9,150, according to a note today.
“The central bank may need to step up its excess liquidity absorption” to bolster the rupiah, economists at PT Mandiri Sekuritas led by Destry Damayanti wrote in a report yesterday. Bank Indonesia should raise its overnight deposit rate, or FASBI, “to give a stronger signal of aggressive monetary tightening.”
The monetary authority is expected to begin raising interest rates in its upcoming meetings starting with the FASBI in June, which would help support the currency, analysts at Oversea-Chinese Banking Corp. led by Gundy Cahyadi wrote in a report today.
The government’s 7 percent bonds due May 2022 dropped the most since November, causing the yield to rise 57 basis points this month, or 0.57 percentage point, to 6.52 percent, according to closing prices from the Inter Dealer Market Association. The yield declined one basis point today.
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