Rupiah’s Onshore Rate at Biggest Premium to Offshore Since 2011

Rupiah quotes within Indonesia are near the biggest premium to an offshore fixing in almost 16 months, fueling speculation policy makers are asking local banks to limit the rate at which they sell dollars.

The currency fell 0.4 percent today to 9,670 versus the greenback as of 2:10 p.m. in Jakarta, according to prices from local lenders compiled by Bloomberg. An average of 18 global lenders’ quotes calculated by The Association of Banks in Singapore and used to settle non-deliverable forward contracts was 2.1 percent weaker than the onshore level at 9,877. The gap was 2.6 percent on Jan. 11, the most since Sept. 22, 2011.

“It seems there are now two rates for the rupiah,” Perry Kojodjojo, a Hong Kong-based foreign-exchange strategist at HSBC Holdings Plc, said in an interview from Singapore today. “What is clear is that the market isn’t functioning well. There is a shortage of dollars onshore. The market is still functioning, but it is increasingly difficult to trade.”

The rupiah sank 5.9 percent in Jakarta last year, the worst performance among Asia’s 11 most-traded currencies, as the nation’s current-account deficit swelled. The shortfall reached 2.4 percent of gross domestic product, the most since 1996, Bank Indonesia estimates. The central bank will intervene “if needed” to reduce the rupiah’s volatility, spokesman Difi Johansyah said in an e-mail today, adding that the monetary authority will not restrict trading beyond certain levels.

‘Unofficial Ceiling’

The last time the rupiah’s onshore rate exceeded the offshore fixing by more than 2 percent was in May 2012, when analysts at Brown Brothers Harriman & Co. said Bank Indonesia has set an “unofficial ceiling” for the currency and asked local lenders not to quote beyond that level. Johansyah declined to comment on the reason for the latest disparity between the rupiah rates.

The monetary authority may not need to intervene directly in the market if they have other measures to persuade banks, Thio Chin Loo, a senior currency analyst at BNP Paribas SA in Singapore, said in an interview today. “Moral suasion can be a powerful tool, which is one way they can act without depleting reserves,” she said.

Indonesia’s foreign-currency reserves increased for a sixth month to $112.8 billion in December, the biggest stockpile since April. The central bank continues to safeguard the rupiah as it takes steps to respond to “out of proportion” concerns about the current-account deficit, Governor Darmin Nasution told reporters in Jakarta on Jan. 11.

‘Highly Regulated’

One-month forwards for the rupiah are trading at 9,905 per dollar and have lost 2 percent in the past month, according to data compiled by Bloomberg. That’s 2.4 percent weaker than the spot rate, which has fallen 0.3 percent over the same period.

“The forwards market is a plainer reflection of the market view for the rupiah, while the spot price is more highly regulated,” Thio said. “The question is how much longer Bank Indonesia hopes to trap the rupiah within a tight range, when confidence will become weak and lead to more flight out of the currency.”

The “two-tiered market” for the rupiah may result in companies hoarding dollars and Indonesians preferring to hold foreign currencies, worsening the shortage onshore, HSBC analysts led by Paul Mackel in Hong Kong wrote in a research note released Jan. 11. Overseas investors may more actively hedge their rupiah-denominated bond holdings, which may prompt the forwards price to decline further, they wrote.

“With Bank Indonesia yet to show a willingness to step into the market to provide meaningful dollar liquidity, we see the risk of further rupiah weakness,” the report said. “For the time being we think that the rupiah at 10,000 remains a sensitive level onshore and if we push closer towards this then we could see stronger Bank Indonesia selling pressure.”

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