The Thai baht was Asia’s best-performing currency by a country mile last year. This year’s winner looks to have been already decided: the Indonesian rupiah.
The currency of Southeast Asia’s most populous nation has rallied for seven straight weeks as the bumper yields offered by the nation’s government bonds enticed carry traders and the central bank said it would allow further gains.
The nation’s local-currency bonds offer yields of between 5% to 8%, an alluring prospect for investors looking to put on carry trades that seek to capitalise from the difference in interest rates between two countries. If they feel brave enough to execute them without currency hedging, investors stand to reap even greater rewards if the rupiah keeps rising.
Just as important as the yield allure has been the tolerant attitude of the central bank. Whereas policy makers generally seek to limit currency gains to support exports, Bank Indonesia said it would refrain from limiting the rupiah’s strength as long as it reflected the improving economy and volatility was manageable. The rupiah jumped as much as 0.8% that day.
The currency extended gains into the next trading session after the United Arab Emirates said it had agreed to set aside $22.8 billion to invest in Indonesia’s sovereign wealth fund, joining Japan’s SoftBank Group Corp and US International Development Finance Corp in giving the nation a vote of confidence.
That’s not to say the rupiah is a one-way bet. Indonesian President Joko Widodo said rapid currency gains may hurt exports and undermine efforts to rein in the current-account deficit. “If the rupiah appreciates too quickly, we should be cautious,” he said.
A possible hiccup awaits this week in the form of a central bank policy decision. While 24 of 27 economists surveyed by Bloomberg predict Bank Indonesia will leave interest rates on hold, three are forecasting a 25 basis-point cut to 4.75%. An easing move, or a hint in that direction, would help restrain further rupiah gains.
For the currency to finish top of the league table this year it has to outperform its peers. Last year’s best performers — the Thai baht and Philippine peso — are both facing challenges that should prevent them from replicating 2019’s gains.