Rupiah Near 18,000 Level Has Markets on Guard for Intervention
The Indonesian rupiah is closing in on a key psychological level, putting investors on watch for a stronger response from the central bank.
The local currency is less than 0.3% away from hitting the 18,000-per-dollar level after touching a new low Wednesday. BNP Paribas SA, MUFG Bank Ltd. and PT Mega Capital Sekuritas expect Bank Indonesia to step up market intervention measures, while further raising interest rates as soon as this month.
Indonesian authorities have defended round numbers in the past and “18,000 is likely a psychological level market participants will be watching closely,” said Parisha Saimbi , a strategist at BNP Paribas. “Bank Indonesia intervention efforts appear likely to try to stem the pace of currency depreciation.”
The rupiah is Asia’s worst-performing currency this year, pressured in part by concerns that elevated oil prices will widen Indonesia’s budget deficit through higher energy subsidy costs. A break beyond 18,000 could accelerate foreign outflows from local stocks and bonds, making the level a key test for policymakers seeking to restore confidence in an economy facing mounting headwinds.
Investor sentiment toward Indonesian assets has deteriorated this year after MSCI Inc. the country could be reclassified as a market, while Fitch Ratings Inc. and Moody’s Ratings their on the sovereign. Concerns have also grown over government efforts to exert greater over key commodity exports.
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The nation’s benchmark to a five-year low Wednesday amid the rupiah’s slide and concerns about a potential sovereign rating downgrade. Indonesia’s trade surplus nearly vanished in April as soaring prices for imported oil and gas outpaced export gains, while inflation accelerated in May.
“The rupiah stability is a key mandate for BI,” said Lloyd Chan , FX strategist at MUFG. “Given the trajectory of rupiah depreciation, BI will likely have to raise rates again in June,” he said, projecting a 50-basis-point hike.
The central bank has rolled out a series of measures to support the local currency and attract inflows, including of rupiah-denominated bills and tightening requirements for dollar purchases. Last month, it markets with a 50-basis-point rate hike. Its next policy decision is due June 18.
BI remains in the markets to stabilize the rupiah and to optimize all policy instruments available to maintain foreign-exchange liquidity and to support financial markets stability, it said in a statement Wednesday.
The central bank’s intensive interventions have come at a cost, with the nation’s foreign-exchange reserves further in April to the lowest in nearly two years. Fitch has warned that a sharp decline in the reserves coverage might lead to a negative rating action.
“BI will continue to intervene in the markets although the impact won’t be significant” as Indonesia’s fundamental risks are getting bigger, said Lionel Priyadi , a macro strategist at Mega Capital. “It might hike rates by 50 to 75 basis points as soon as this month.”
