by winston » Sun Oct 18, 2015 7:54 pm
not vested
Oct 14, 2015
Morgan Stanley: Indonesia Rupiah’s Rally Won’t Last By Shuli Ren
Along with other high-yielding currencies, the Indonesian rupiah surged to a 4-month high on bets that the Federal Reserve won’t raise rates this year.
As of yesterday’s close, the rupiah has already gained 7% this month, boosting the iShares MSCI Indonesia ETF (EIDO) to 17.4% gain in October.
But Morgan Stanley‘s Kritika Kashyap and team think the rupiah’s rally will lose steam soon, in part because it was the result of hurried short covering. The rupiah was sold off heavily in the third-quarter, down over 10%.
The analysts wrote:
A look at BI’s weekly balance sheet confirms a significant tightening in reserve money/monetary base in the last week of September by IDR 58.5 trillion (~US$4 billion). On the assets side, BI’s net foreign assets fell by IDR 20 trillion (~US$1.4 billion) in the same week.
Not only did system liquidity tighten in the last week of September, but offshore IDR market liquidity was also thin. While liquidity data are not easily available for NDFs, volume data from DTCC (clearing company) shows that NDF liquidity at the beginning of October was almost 50% lower than September.
Anecdotal evidence from brokers also suggests that daily trading volumes last week averaged between US$300 million and US$400 million compared to usual trading volumes of ~US$500-600 million.
Thin liquidity, in addition to the heavy short positioning in IDR, exaggerated the price action, as stops were triggered and shorts squeezed out given the high carry.
In addition, while acknowledging that structural reforms were gaining momentum, Morgan Stanley said on a real effective exchange rate basis, rupiah was no longer undervalued.
The bank maintains its year-end target of 14,000 per dollar. The rupiah rose 2.4% trading at 13,296 recently.
Source: Barron's Asia
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