The Thai baht was Asia’s best-performing currency last year, while 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 local government bonds enticed carry traders and the central bank said it would allow further gains.
Indonesia’s local-currency bonds offer yields of between 5 and 8 percent, an alluring prospect for investors looking to place carry trades, which seek to capitalize on the difference in interest rates between two nations.
If they are brave enough to execute the trades without hedging the currencies, 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 Indonesian central bank.
Whereas policymakers generally seek to limit currency gains to support exports, Bank Indonesia on Jan. 10 said that it would refrain from limiting the rupiah’s strength as long as it reflected the improving economy and volatility remained manageable.
That is not to say the rupiah is a one-way bet.
Indonesian President Joko Widodo last week said that rapid gains in the currency could hurt exports and undermine efforts to rein in the nation’s current-account deficit.
“If the rupiah appreciates too quickly, we should be cautious,” Widodo said.
A possible hiccup also awaits this week in the form of a central bank policy decision.
While 24 of 27 economists surveyed by Bloomberg predicted that Bank Indonesia would leave interest rates on hold, three are forecasting a 25 basis-point cut to 4.75 percent.
An easing, or a hint in that direction, would help restrain further rupiah gains.
Meanwhile, Gavekal Capital says that the Year of the Rat, which begins next week, is lining up to be a strong year for the yuan and Chinese government bonds.
Gavekal Capital, a fund manager with about US$1.5 billion of equities and bonds under management, forecast that bonds of the world’s second-largest economy would deliver a 10 percent return this year, given both the strengthening yuan and the relatively high yields.
“Where else in the world can you get 10 percent return on a fairly minimal risk government bond market?” Gavekal Capital chief executive officer Louis-Vincent Gave said in an interview while on a visit to the Norwegian capital, Oslo.
Part of that return would be driven by the strengthening yuan, which is to be stoked by both easing trade tensions and the fallout from the unrest in Hong Kong.
The yuan has appreciated about 4 percent against the US dollar since hitting a low in September last year.
‘PHASE ONE’ DEAL
Part of the “phase one” trade deal signed last week in Washington includes commitments by both nations to avoid competitive currency devaluations.
While the two-page currency chapter was met with skepticism, Gave said that the signals out of China are that it is content with a stronger currency.
As the nation also opens up its US$45 trillion market this year and Hong Kong unrest persists, China would take further steps to promote its financial centers, Gave said.
This year will “be a very strong renminbi [yuan] year,” he said. “With the Chinese not only pushing up the renminbi, but also opening up capital controls at the same time in a bid to promote Shanghai relative to Hong Kong.”
Signs that inflation is moderating in China could also give the central bank scope to add stimulus this year to cushion an economic slowdown, he added.
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