Rupiah Forwards Decline on Concern Fed Will Scale Back Stimulus

Indonesia’s rupiah forwards fell by the most in two weeks on speculation a pickup in the U.S. economy will prompt the Federal Reserve to scale back pro-growth policies that have spurred fund flows into emerging markets.

The Bloomberg-JPMorgan Asia Dollar Index dropped to a two-month low before a report that economists predict will show demand for durable goods rose the most in three months in the world’s largest economy. Global funds pulled 730 billion rupiah ($75 million) from their holdings of local-currency government debt this month through Jan. 23, according to the latest data from the finance ministry.

“The forwards purely reflect overseas investors’ sentiment on the rupiah,” said Fahrudin Haris Prastowo, a foreign-exchange trader at PT Bank Rakyat Indonesia in Jakarta. “Economic recovery in the U.S. would increase the likelihood that the Fed will halt its stimulus at the end of the year.”

The currency’s one-month non-deliverable forwards fell 0.6 percent to 9,865 per dollar as of 4:28 p.m. in Jakarta, data compiled by Bloomberg show. That’s 1.6 percent weaker than the spot rate, which declined 0.6 percent to 9,710, prices from local banks compiled by Bloomberg show. A daily fixing used to settle the derivative contracts was set at 9,783 today by the Association of Banks in Singapore.

Bank Indonesia is boosting the supply of dollars in the market to help increase confidence in the capital market, Hendar, executive director for monetary policy, said in an interview today. The central bank aims to narrow the gap between the rupiah’s onshore and offshore quotes, he said.

One-month implied volatility in the rupiah, which measures expected moves in exchange rates used to price options, was steady at 6.25 percent, the least since Jan. 9.

Fed Outlook

Minutes of the Fed’s December meeting, released earlier this month, indicated that officials began debating an end to their unprecedented bond-buying program as early as this year. The central bank has already scooped up $2.3 trillion of Treasuries and mortgage-related bonds since 2008 in two rounds of quantitative easing that debased the U.S. currency. Fed officials begin a two-day policy meeting tomorrow.

The yield on the 5.625 percent government bonds due May 2023 dropped three basis points to 5.18 percent in Jakarta, the lowest level since Jan. 9, according to closing prices from the Inter Dealer Market Association.

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