Matthew Burgess and Marcus Wong – Overseas investors have returned to Indonesia's bonds en masse, a shift which has helped spur gains in the rupiah.
Global funds snapped up about 47% of bonds at a primary auction on Tuesday, the most since June 2019, according to data compiled by Bloomberg. This adds to $4.7 billion of foreign inflows in the secondary market since November, set for the biggest three-month inflow since the first quarter of 2019, the data show.
"Foreign bid was strong at the auction due to a combination of better sentiment and positioning," said Winson Phoon, head of fixed-income research at Maybank Securities Pte in Singapore. "Foreign funds had been trimming their positions for the better part of 2022 before a turnaround from November amid signs of peaking inflation and rates in the US."
The return of money from overseas has helped fuel a rally in the rupiah, which had fallen behind as emerging-market currencies rebounded on bets for a slower pace of Federal Reserve rate hikes.
Indonesia's currency has strengthened 3.2% this year, the second-best performer in Asia, as the greenback weakened and local authorities directed exporters to temporarily hold more FX proceeds onshore. The rupiah was at 15,080 against the dollar as of 1 pm in Jakarta.
To be sure, the rally won't be linear. The rupiah may consolidate around these levels after the "really quick appreciation," said Galvin Chia, a strategist at Natwest Markets in Singapore. Technical levels indicate it may be range bound between 15,160 and 15,300 for the next week or so into Lunar New Year, he said.
Even so, some strategists tracked by Bloomberg see the rupiah strengthening toward 15,000 per dollar by the end of March, as emerging-market currencies benefit from a possible slowdown in Fed tightening.
The rupiah is being driven in part by foreigners buying local bonds and "that's where the outperformance will come from," said Brendan McKenna, an emerging-market currency strategist at Wells Fargo Securities in New York.