The twenty-two month decline of the rupiah against the dollar has taken on a more volatile and rapid tenor in the past six weeks and notably in the month since Federal Reserve Chairman Bernanke first proposed the curtailment and possible end of quantitative easing on May 22nd.
From July 4, 2012 to today's close the rupiah has lost 6.7%, but one third of that drop took place in the past month and a half. More striking has been the increase in volatility. Daily ranges surged to 1%, 2%, 3% and more as the contest between the money leaving the equity and bond markets contested with intervention from the Bank of Indonesia.
The rupiah is still vulnerable on several fronts. The Fed announcement was a signal to investors, particularly in the bond markets where foreigners hold more than $31 billion in rupiah bonds, about 34% of the outstanding total, that the search for return in overseas markets was entering a much more volatile period. Emerging market economies have been pummeled by the global economic slowdown, and especially for Asian nations, the uncertainty in China. Foreign investors assume currency risk that has potential to change the risk reward calculus of longer term investments.
Indonesia's current account deficit of $24 billion and foreign currency reserves of $105 billion and short-term debt of about half the level of reserves makes it unclear how active the central bank could be in defending the rupiah. Two weeks ago the bank raised policy rates in an effort to make bonds more attractive and support the currency.
Technically the rupiah has formed a pennant since the first week of the month with the apex at 9965 and a slight bias down.
With the shock of the Fed QE warning wearing off, recovering global equity markets, weaker US data bringing to question the economic logic of ending QE, the modest intervention of the Bank of Indonesia and the prospect of taking profits, the rupiah looks set to regain some of its lost ground. Provided, of course, there are no other economic or financial disturbances that send foreign investors fleeing emerging markets once again.
Chief Market Strategist