Rupiah is Asia’s best-performing currency this year, boosted by carry trade appeal

Sydney – The Indonesian rupiah is

off to a roaring start at the beginning of the year,

thanks to the currency’s appealing carry trade returns, and analysts are betting that it may end 2023 with the biggest annual gain in more than a decade.

The currency has climbed about 3 per cent in 2023 in Asia’s best performance, rising to 15,134 per United States dollar on Friday, and may further rise to 14,200 by the year end as foreigners raise holdings of local debt that offers one of the highest yields in the region, according to strategists at Maybank and Jefferies. This would extend the year’s rally to about 9 per cent, its biggest annual gain since 2009.

A currency carry trade is a strategy whereby a high-yielding currency funds the trade with a low-yielding currency. A trader using this strategy attempts to capture the difference between the rates.

“We see very little reason why it would not continue, given the carry, the leverage to commodities and not to mention a pragmatic central bank,” said Jefferies currency strategist Brad Bechtel, who expects the rupiah to trade at 14,250 in six to 12 months.

“We may have a broader US dollar correction higher in the near term, but that would be a great sell opportunity for dollar-rupiah, especially if we get back into the 15,300 area.”

The rupiah delivered the best carry returns in Asia in 2023 when funded through the US dollar, euro and Japanese yen, according to Bloomberg-compiled data. The carry trade should continue, given that Indonesian local currency bonds will be favoured, said Mr Galvin Chia, a strategist at Natwest Markets in Singapore.

“It has got lower correlation to the US dollar than some of its peers like the won, the Singapore dollar and the baht,” he said.

Foreign investors returned to Indonesia’s bond market late in 2022 after shunning the country for most of the year, and there is scope for more buying. While offshore funds bought a record US$3.3 billion (S$4.4 billion) last month, they remain underweight on Indonesian debt, holding just 15 per cent of total outstanding issuance, well below pre-pandemic levels.

Indonesia’s 10-year bonds, offering one of the highest yields in the region, are another lure for overseas investors. The note offers a real yield of about 1.3 per cent amid easing price pressures. The nation’s central bank expects inflation to continue easing and return towards its 2 per cent to 4 per cent target by the second half of the year, and has signalled an end to monetary tightening.

The nation’s trade surplus is among the highest in Asia, helped by booming commodity exports including palm oil and nickel. While it is expected to easein 2023, the government’s forecast of a US$38.5 billion surplus for this year is still higher than in 2021, and may help support the rupiah.

The rupiah has rallied as foreign investors flocked back to its bond market to pare almost half of its losses over the past two years. Along with a weakening US dollar, continued bond inflows will extend the rally, said Maybank strategist Alan Lau. BLOOMBERG