New Indonesian Law Is Boosting Asia’s Worst-Performing Currency

(Bloomberg) -- The Indonesian rupiah has languished at the bottom of Asian currency rankings for most of the year but a recent overhaul of the nation’s investment law may help revive its fortunes.

The rupiah rose about 1% against the dollar last week after Indonesia approved its first omnibus law aimed at cutting red tape to boost investments and create jobs. That’s after a loss of 4.1% in the quarter ended September amid concern over Bank Indonesia’s independence, debt monetization and an economy poised for its first annual contraction since 1998.

“The passing of the omnibus labor law is good news for the rupiah as it’s a long-term structural reform that will improve the growth prospects of the economy,” said David Forrester, FX strategist at Credit Agricole CIB in Hong Kong. “We forecast USD/IDR to reach 14,500 by year end.”

The rupiah, which traded at 14,700 against the dollar on Friday, has fallen 5.7% so far this year as Asia’s worst performer.

Even though the rupiah failed to breach resistance at its 200-day moving average, support near 15,000 has held in the second half of the year aided by a burgeoning trade surplus, and Bank Indonesia’s support. Not only has the central bank intervened in the currency market, it has also left rates unchanged at its last two meetings.

Rupiah bulls will therefore be focusing on the central bank’s policy decision Tuesday, hoping that it continues to prioritize the currency’s stability over growth by keeping rates at present levels. All of the nine economists in Bloomberg’s survey forecast that BI will continue to be on hold.

Read: Indonesia’s Debt Experiment Fuels Vicious Cycle of Foreign Exits

Global risk sentiment still remains a risk for rupiah’s appreciation given 27% of the nation’s bonds are held by foreign investors. The virus spread is another concern as the nation reported the most number of cases last week since the start of the outbreak. And while investors have cheered the new investment law, workers have mounted protests on concerns it erodes their labor rights.

“The outlook for rupiah in the coming weeks will hinge on global risk sentiment given IDR is a high yielder in Asia,” said Irene Cheung, FX strategist at ANZ Banking Group Ltd. in Singapore. “On this front, the U.S. election will be a key watch given the high uncertainty and news flows.”

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

• Monday, Oct. 12: Japan PPI and core machine orders, Malaysia industrial production, India CPI and industrial production
• Tuesday, Oct. 13: RBNZ’s Bascand speaks and New Zealand retail card spending, China trade balance, Bank of Indonesia rate decision
• Wednesday, Oct. 14: Australia consumer confidence, Japan industrial production, Bank of Korea rate decision, Singapore 3Q GDP
• Thursday, Oct. 15: RBA’s Lowe speaks and Australian employment, China CPI and PPI, Indonesia trade balance, Philippine overseas remittances, India trade balance
• Friday, Oct. 16: New Zealand businessNZ manufacturing PMI, Singapore non-oil domestic exports

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