Selloff in Indonesia Currency, Bonds Deepen Before Rate Decision

(Bloomberg) -- Indonesian currency tumbled to a 31-month low and bonds fell for a second day as foreign investors dumped the nation’s assets after a spike in benchmark U.S. yields. Stocks snapped a two-day decline.

The rupiah slumped to as low as 14,114 to a dollar, the weakest level since October 2015, before closing at 14,093, while the yield on benchmark 10-year government bonds rose 12 basis points to 7.217 percent. The benchmark Jakarta Composite Index ended 0.1 percent higher, reversing a 1.7 percent intraday decline.

A fresh wave of risk aversion is spreading across Asia as investors grapple with rising Treasury yields and a strong dollar amid lingering trade, growth and geopolitical worries. That’s adding pressure on Bank Indonesia to increase interest rates on Thursday as it seeks to stem the sell-off that’s made the nation’s currency and stocks among the worst performers in Asia. A series of terror attacks this week have further soared investor sentiment.

“Investor sentiment has been weak to begin with, and now we’ve got this series of bomb attacks and various reports of other terror scare. All of these have raised the uncertainties on Indonesian market further,” said John Teja, a director at PT Ciptadana Sekuritas Asia. “The rupiah is also weakening. At this point I don’t see any positive catalyst that can reverse the trend.”

A series of terror attacks rocked Indonesia this week, killing at least 26 people, including a total of 13 militants and their children, according to the Associated Press. The police shot dead four sword-wielding men who attacked a police headquarters in Sumatra province on Wednesday, which also killed a police officer, the agency reported.

Foreign Outflows

Foreign investors are net sellers of about $2.9 billion of Indonesian stocks this year, turning the nation’s equities into the worst performer in Asia. Net outflows from rupiah bonds have totaled $2.3 billion since the end of March, data compiled by Bloomberg show.

The benchmark Indonesian stock index has dropped 8.1 percent this year, hitting its lowest level since June last week. The decline may be spurring some investors to return to the market, said Jahanzeb Naseer, head of research for Credit Suisse Group in Jakarta.

“Some local institutional funds and long-term investors started buying Indonesian stocks from yesterday,” Naseer said. “The expectation for a rate increase tomorrow helps the sentiment and markets responded positively to that.”

Click here to read more about reasons for Indonesia selloff

The selloff also spread to dollar bonds from Indonesian issuers after the nation posted the biggest trade deficit in four years on Tuesday, fueling speculation the local currency will weaken further and push up servicing costs on international debt.

“Indonesia’s trade deficit number yesterday was much weaker than expected and the rupiah reacted to that,” said Bharat Shettigar, head of Asia ex-China corporate credit research at Standard Chartered Bank. “That places pressure on the central bank to hike rates in tomorrow’s policy meeting.”

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