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Rupiah Rises as Central Bank Drains Surplus Cash; Bonds Decline

Indonesia’s rupiah gained after the central bank outlined steps it would take to drain cash in the economy to help temper inflation. Bonds declined.

The monetary authority will raise interest rates on bills and term deposits to absorb surplus funds in the financial system and continue to intervene in the currency market to reduce volatility in the rupiah, it said yesterday, after keeping borrowing costs unchanged at 5.75 percent. The nation’s one-year notes dropped after the announcement, sending yields to the highest level since January. The overnight money-market rate held at 3.75 percent, unchanged since February.

“Bank Indonesia’s statement that it will take steps to narrow the spread between the reference rate and overnight rates makes the rupiah very attractive to investors,” said Rully Nova, a currency analyst at PT Bank Himpunan Saudara 1906 in Jakarta.

The rupiah advanced 0.8 percent to 9,190 per dollar as of 4:10 p.m. in Jakarta, according to prices from local banks compiled by Bloomberg. The currency strengthened 1.1 percent this week after closing at 9,276 on May 4, the lowest level since June 2010.

One-month implied volatility, which measures exchange-rate swings used to price options, was at 7.5 percent, up one percentage point from a week ago. Indonesia’s foreign-exchange reserves increased 5 percent to $116.4 billion in April, the highest since August, official data show.

The rupiah is among the least favored currencies at Societe Generale SA because of “too much complacency” in the market as shown by low volatility and pricing for forward contracts, Wee-Khoon Chong, Hong Kong-based strategist at the bank, wrote in a note to clients today.

The yield on the government’s 7 percent bonds due May 2022 climbed four basis points, or 0.04 percentage point, to 6.25 percent, the highest level since Dec. 19, according to closing prices from the Inter Dealer Market Association. It rose 21 basis points for the week.

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