Rupiah’s Carry Trade Nemesis to Become Its Savior This Quarter

(Bloomberg) -- Carry trades that dragged Indonesia's rupiah to the bottom of Asia's league table in the first quarter are now poised to support its remarkable rebound.

The currency surged six times more than its closest regional rival in April, erasing half its drop over the previous three months. There may be more gains to come as global funds are enticed back into Indonesian bonds, the highest yielding in Asia.

“Rates volatility has declined quite sharply in recent weeks, which suggests a more favorable environment for carry,” said Divya Devesh, head of Asean and South-Asia FX research at Standard Chartered Plc in Singapore. “Bond-flow driven high-carry currencies like the Indonesian rupiah should benefit in the current environment.”

This is evident in data that show outflows from overseas investors waning in April, following heavy selling in March that saw them offload a net $7.5 billion of the nation's sovereign debt, as they unwound carry trades.

Bank Indonesia Governor Perry Warjiyo's view that the rupiah remains “fundamentally undervalued” eases concern about the risk of renewed currency depreciation. It also helps offset the impact of the country scrapping its deficit ceiling and S&P Global Ratings cutting its outlook on Indonesia to negative.

Virus Risks

But the currency still has to combat other headwinds created by the coronavirus, if April's performance is to be repeated.

Economists surveyed by Bloomberg expect data this week to show that the economy contracted 1.33% in the first quarter from the three months through December. On a year-on-year basis the median projection is for growth to slow to 4.11%, from 4.97% previously.

Stringent social distancing rules in Jakarta have been extended until May 22 and the government has warned that in a worst-case scenario the currency could weaken to 20,000 versus the dollar this year.

For now though, Indonesia's yields are alluring, central bank purchases are supporting the market and investors are taking their cue from Governor Warjiyo. He sees the rupiah at 15,000 by the end of the year -- a level the currency has just reached and may better if bond inflows gather pace.

Below are the key Asian economic data and events due this week:

Monday. May 4: Australia job advertisements and building approvals, South Korea CPI, Indonesia CPI, Malaysia trade balance
Tuesday, May 5: RBA rate decision, Indonesia 1Q GDP, Philippines CPI, Singapore retail sales, Bank Negara Malaysia rate decision, Thailand CPI and business sentiment index
Wednesday, May 6: Australia retail sales, New Zealand 1Q unemployment rate and employment change, Philippine trade balance
Thursday, May 7: Australia trade balance, New Zealand 2-year inflation expectations, BOJ minutes of March meeting, China trade balance and Caixin PMI, South Korea BoP current account balance, Philippine 1Q GDP
Friday, May 8: RBA statement on monetary policy, Japan labor cash earnings, household spending and services PMI, China 1Q current account balance, Malaysia industrial production