Rupiah Has Worst Week Since 2011 as Central Bank Allows Decline

Indonesia’s rupiah fell by the most since September 2011 this week as the central bank allows a more rapid slide toward levels quoted in the offshore market. Government bonds declined.

The currency is moving toward a new equilibrium that is in line with economic fundamentals, Bank Indonesia said in a July 23 statement after the rupiah dropped the most in 13 months that day. The 2012 current-account deficit was the largest since 1996, while the country recorded trade shortfalls in seven of the eight months through May, official data show. Foreign-exchange reserves dropped below $100 billion in June for the first time since February 2011, according to the central bank.

“Bank Indonesia has started allowing larger rupiah depreciation to maintain foreign reserves and boost exports,” said Dian Ayu Yustina, an economist at PT Bank Danamon Indonesia in Jakarta. “I’m still pessimistic toward our external balance as our trading partners have not shown sustainable recovery, so that will weigh on our trade deficit.”

The rupiah declined 1.8 percent this week to 10,266 per dollar as of 3:46 p.m. in Jakarta, prices from local banks show. The spot rate reached a four-year low of 10,286 yesterday and was steady today. It traded at a 2 percent premium to the one-month non-deliverable forwards, which weakened 1.1 percent in the last five days to 10,473.

Worst Performer

The monetary authority has allowed the rupiah to gradually decline, Deputy Governor Perry Warjiyo said July 12. It has lost 3.3 percent against the dollar this month, the most among the 11 most-traded Asian currencies. The one-month forwards were as much as 5 percent stronger than the spot rate in June.

A fixing by the Association of Banks in Singapore that is used to settle the forwards was set at 10,277, compared with 10,170 on July 19. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 81 basis points this week to 12.52 percent, data compiled by Bloomberg show.

The yield on the 5.625 percent bonds due May 2023 rose nine basis points, or 0.09 percentage point, this week to 7.96 percent, according to prices from the Inter Dealer Market Association. The yield closed at a two-week low of 7.43 percent on July 23 after reaching 8.3 percent last week, the highest since 2011.

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