Asia’s Best-Performing Currency Stumbles, Prompting Central Bank Support

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The Indonesian rupiah’s eye-catching rally has hit a snag.

A 16% surge this quarter stumbled on Wednesday after traders worried that Bank Indonesia is getting concerned about the rapid gains. Governor Perry Warjiyo had put a niggle in the minds of investors, when in response to a question on Tuesday, he indicated that the central bank will be mindful of exports.

The rupiah fell more than 1% on Wednesday. That prompted intervention from the central bank to “stabilize rupiah exchange rate,” according to Nanang Hendarsah, executive director for monetary management at BI.

To reassure investors, Warjiyo issued a statement arguing that the currency remains undervalued, and could notch up further gains. The rupiah’s stability is a key part of the central bank’s policy, with consideration over how it impacts investment flows playing a part in decisions to hold policy rates instead of cutting.

The market may have interpreted Warjiyo’s comments on supporting exports as an indication that BI “may not be in favor of further appreciation,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore. The governor’s latest statement “could see a resumption of near-term gains,” Goh said.

Export Help

The rupiah’s rebound from a two-decade low reached in March has made it Asia’s best-performing currency this quarter. A global risk rally, driven by optimism over economies reopening after virus-induced shutdowns, has brought investors back to Indonesia’s bonds and stocks.

The sharp gains in the currency prompted Coordinating Minister for Economic Affairs Airlangga Hartarto on Tuesday to urge Warjiyo to temper gains to help exporters.

“The rupiah is currently undervalued and potentially it will continue to appreciate going forward,” Warjiyo said in Wednesday’s statement. “Inflation is low, interest rate differential is high, and the current account deficit is much lower than expected. Rupiah appreciation is also good for the economy, as the positive impact on imports will outweigh the impact on exports.”

Bank Indonesia will stabilize the currency in line with its fundamentals and market mechanism, he said.

Stocks Slide

Rupiah dropped as much as 1.2% to 14,055 to a dollar, the most since May 4, and is the only Asian currency to decline Wednesday. The nation’s stocks and bonds also declined, with the benchmark Jakarta Composite Index of shares sliding 2.7% as of 2:09 p.m. local time. The yield on benchmark 10-year sovereign bonds rose five basis points to 7.305%.

Overseas investors have bought a net $1.7 billion of Indonesia’s bonds and stocks so far this quarter, after dumping $9.3 billion of assets in the first three months of this year, according to data compiled by Bloomberg.

Mitul Kotecha, a senior emerging markets strategist at TD Securities in Singapore, said Bank Indonesia probably wants to smooth the pace of rupiah appreciation.

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