Rupiah’s year-end recovery indicates further gains in the offing

The Indonesian rupiah may be on the cusp of a rally. Its rebound from the worst-performing Asian currency to No. 2 in the final three months of 2020 signals potential for further gains.

The removal of U.S. election risk and supportive coronavirus vaccine developments aided the rupiah’s rise to near resistance at 13,873, its June 8 high, before it ended the year at 14,050. A Bloomberg survey shows forecasts for as high as 13,600 by the end of the first quarter.

“We expect stronger fiscal support under a Biden administration, which will bode well for the U.S. economy, global growth and investor sentiment, a key positive for risk currencies like IDR,” said Irene Cheung, FX strategist at Australia & New Zealand Banking Group Ltd. in Singapore.

The rupiah’s year-end rally mostly erased its annual losses but it was still Asia’s second-worst performer of 2020 after the Indian rupee. However, tailwinds for the currency are growing as Indonesia is expected to attract one of the highest inflows in Asia upon revival of global risk sentiment once the vaccine becomes widely available.

Cheung sees carry currencies or high yielders like the rupiah to be attractive as the Federal Reserve will remain “highly accommodative.”

Indonesia’s 10-year yield dropped 117 basis points in 2020, but its spread over Treasuries is still among the highest in the region. Foreign funds were net sellers of $4.7 billion of Indonesian debt last year, indicating potential for inflows as investors deploy cash early in the year.

Near-term cues for the rupiah would come from inflation data on Monday. The central bank held rates in its last review amid benign consumer prices. The median estimate in Bloomberg’s survey forecasts December inflation at 1.67% year-on-year, in line with its November reading.