Rupiah Tops Real as Japan Investors’ Currency-Tied Note Favorite

Japanese household investors, who collectively poured more than $36 billion into uridashi bonds last year, are switching to the Indonesian rupiah from the Brazilian real for their currency-tied bets.

The real, the favorite among such investors for nine months last year, was overtaken by the rupiah in December as the top currency for uridashi notes with returns linked to foreign exchange rates, Bloomberg-compiled data show. Issuance of real-tied bonds totaled $68.9 million last month, compared with $84 million of rupiah-linked securities, the data show.

“There are some concerns among investors about emerging market currencies because they have generally been weakening,” Shinichiro Kadota, a foreign exchange strategist at Barclays Plc in Tokyo, said by phone on Jan. 6. For Indonesia, relatively high interest rates and better political developments have helped it attract investors, he said.

Indonesia’s rupiah gained 11.8 percent against the yen last year, making it the fourth-best performing emerging market currency, as Joko Widodo, sworn in as president in October, pledged to boost growth via reforms such as raising fuel prices. Brazil, whose currency gained 1.2 percent against the yen in 2014, saw its economy barely expand in the third quarter, and President Dilma Rousseff’s growth goal is complicated by rising interest rates to control inflation.

Risk-Off Environment

“On a relative scale, it looks like Indonesia has managed to sell more on its reform momentum than Brazil,” Wellian Wiranto, a Singapore-based economist at Oversea-Chinese Banking Corp., said on Jan. 6. Both will face the “travails of any global risk-off environment and ripple effect” from a potential interest rate increase by the U.S. Federal Reserve, he said.

Currency-linked notes pay different interest based on exchange rates. A five-year bond sold by Helsinki-based Municipality Finance Plc on Dec. 10 pays 7 percent for its first coupon and thereafter, 7 percent if the real rises above a certain level against the yen, or 0.1 percent if it doesn’t, according to Bloomberg-compiled data.

The Brazilian currency is expected to weaken to 2.74 per U.S. dollar by the end of this year, compared with 2.66 on Jan. 8, according to the median forecast of analysts surveyed by Bloomberg. The Fed will probably raise its interest-rate target for overnight loans between banks to around 1 percent in the fourth quarter, another Bloomberg analyst poll shows.

Sales of U.S. dollar-denominated uridashi bonds in December rose 57.3 percent from the previous month to $350 million, making the greenback the second-most popular non-yen currency after the Australian dollar, according to Bloomberg-compiled data.

“The popularity of the U.S. dollar has been recovering in the uridashi bond market,” Yujiro Goto, a currency strategist at Nomura Holdings Inc. in London, said. “Expected rate hikes by the Fed this year will increase that popularity further.”

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