Rupiah Forwards Reach Biggest Discount to Spot Rate Since 2011

Indonesia’s rupiah forwards reached the biggest discount to the spot rate in 21 months after Chairman Ben S. Bernanke said the Federal Reserve is prepared to begin phasing out its stimulus program.

The MSCI Asia Pacific Index of stocks dropped 4.2 percent after Bernanke said yesterday the Fed will probably taper its $85 billion in monthly bond buying later this year and halt purchases around mid-2014 as long as the U.S. economy performs in line with its estimates. The Indonesian government will raise fuel prices this month and that will strengthen the rupiah so it achieves the budget assumption for a 9,600 per dollar average rate in 2013, Finance Minister Chatib Basri said yesterday.

“Offshore prices are affected by sentiment from comments from the Fed that they plan to reduce bond-buying,” said Suriyanto Chang, head of treasury at PT Bank QNB Kesawan in Jakarta. “Just as Basri said, past experience shows that after raising fuel prices the rupiah’s reaction is significantly positive, so we expect the same to happen.”

One-month non-deliverable forwards for the rupiah declined 2.1 percent to 10,459 per dollar as of 3:38 p.m. in Jakarta and touched 10,566, the weakest level since August 2009, data compiled by Bloomberg show. The contracts traded as much as 6 percent weaker than the onshore spot rate, which fell 0.2 percent to 9,928, prices from local banks show.

One-month implied volatility in the rupiah, a measure of expected moves in the exchange rate used to price options, surged 1.95 percentage points to 15.12 percent, the highest level in a year.

‘Assumption Isolated’

The local currency has averaged 9,723 per dollar so far this year, which means it would need to trade at an average of around 9,477 for the rest of 2013 to meet the budget estimate. The nation last increased fuel prices on May 24, 2008, after which the rupiah gained 3 percent over the next 10 weeks. The nation also raised prices twice in 2005, Basri said.

“The assumption is rather isolated,” said Andy Ji, a foreign-exchange strategist at Commonwealth Bank of Australia in Singapore, referring to the average rupiah estimate in the budget. “Dollar demand will continue for a while as the market is repricing the effect of the Fed tapering its stimulus.”

Bank Indonesia continues to ensure foreign-currency supply, Governor Agus Martowardojo told reporters in Jakarta today. The financial stability forum, which includes the finance minister, Financial Services Authority and the central bank, will meet tonight to improve coordination in efforts to stabilize the market, he said.

The yield on the 5.625 percent sovereign bonds due May 2023 climbed seven basis points, or 0.07 percentage point, to 6.76 percent, the highest level since November 2011, prices from the Inter Dealer Market Association show.

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