Rupiah’s World-Beating Rally Faces Trade Hurdle: Market Reversal

Indonesia’s rupiah is set to snap its world-beating gains of the past week, trading patterns suggest, amid concern a clampdown on commodity exports will swing the nation’s trade balance back to the red.

The currency strengthened 3.3 percent in the five days through yesterday to 11,785 per dollar, sending a measure known as its 14-day relative-strength index to 24, the lowest since May 2011. Readings below 30 indicate a turnaround is likely. The rupiah also breached its Bollinger band as it climbed to a three-month high this week, adding to signs the rally may be overstretched.

December’s trade surplus was the biggest in more than two years and helped rein in a current-account deficit that spurred an exodus of funds from Indonesian assets in 2013, when the currency sank 21 percent. The nation banned shipments of unprocessed ore last month to encourage investment in smelters and refineries, a policy that Nomura Holdings Inc. and Bank of Tokyo-Mitsubishi UFJ Ltd. say led to front-loading of exports that distorted trade figures toward the end of last year.

“There’s very little room for the rupiah to gain because it has already strengthened so much,” Leong Sook Mei, the Southeast Asia head of global markets research at Bank of Tokyo-Mitsubishi in Singapore, said in an interview. “The quality of Indonesia’s current-account improvement remains suspect. And of course we still have electoral risk.”

A legislative election is scheduled for April and Indonesians will vote again in July to choose a successor to President Susilo Bambang Yudhoyono, who has led the country since 2004. Joko Widodo, the reform-minded Jakarta governor who is leading in opinion polls, has yet to secure his party’s nomination to run.

Asset Inflows

The rupiah rose as much as 1.4 percent to a three-month high of 11,658 yesterday, according to prices from local banks compiled by Bloomberg. The currency fell 0.5 percent to 11,844 per dollar in Jakarta today, while one-month non-deliverable forwards dropped 0.5 percent to 11,740.

Indonesia’s current-account deficit shrank to 1.98 percent of gross domestic product in the fourth quarter, from 3.8 percent in the previous period, the central bank said Feb. 13.

The gains in the Indonesian exchange rate in the five days through yesterday were the most among some 150 currencies tracked by Bloomberg. Overseas investors have pumped $1.2 billion into the country’s stocks and local-currency bonds this year on the improving economic data.

The country posted a $1.5-billion trade surplus for December on Feb. 3 as exports rose 10.3 percent from a year earlier, more than the median estimate in a Bloomberg survey, which saw a 1.7 percent increase.

Fair Value

Bank Indonesia raised its benchmark interest rate by 1.75 percentage points last year to slow the economy and rein in the current-account shortfall, which ballooned to a record 4.4 percent in the second quarter. The central bank said last week the deficit in the broadest measure of trade would probably be 2.5 percent this year, from 3.26 percent in 2013.

“Because of the front-loading of the ore exports, we don’t think the trade surplus will continue in the first quarter and beyond,” Enrico Tanuwidjaja, a Singapore-based economist at Nomura, said in a phone interview yesterday.

Goldman Sachs Group Inc. estimates “fair value” for the rupiah at around 11,800 per dollar, Singapore-based analyst Mark Tan wrote in a Feb. 12 note. The U.S. bank had forecast the currency to reach that level in 12 months.

A gauge of expected fluctuations in the rupiah is the highest among its Southeast Asian peers. Three-month implied volatility rose 10 basis points, or 0.1 percentage point, to 11.41 percent today. That compares with 7.23 percent for Malaysia’s ringgit and 6.6 percent for Thailand’s baht.

‘High’ Volatility

“Volatility in the rupiah could still be high in the first half,” Dian Ayu Yustina, a Jakarta-based economist at PT Bank Danamon, majority-owned by Singapore’s Temasek Holdings Pte, said in an interview yesterday. “We’re still cautious on the rupiah because the trade surplus could have been distorted.”

After the rupiah’s daily trading range breached the lower end of its Bollinger band in October and the relative-strength index fell past the 30 threshold, the rupiah weakened from that month’s high of 10,930 to a five-year low of 12,285 on Jan. 7.

Developed by John Bollinger in the 1980s, the bands are used by technical analysts to identify the turning point in an asset’s trajectory. The limits represent two standard deviations from the 20-day moving average, implying that the likelihood of a currency moving outside the band is small.

Commodity-Channel Index

The dollar’s 20-day period commodity channel index against the Southeast Asian currency dropped below minus 100 last week, suggesting the dollar was oversold, data compiled by Bloomberg show. The index was minus 126 today.

The rupiah may weaken to around 12,000 per dollar in the short term and trade in a range of 11,500 to 12,000 over the next three months or so, said Koji Fukaya, chief executive officer and currency strategist at FPG Securities Co. in Tokyo.

“I wouldn’t be surprised if the rupiah sees some correction from quite a sharp rally,” he said in a phone interview from Tokyo. “It may be stabilizing overall, but there needs to be technical corrections from time to time.”

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