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China has pledged to keep the yuan exchange rate basically stable, easing market fears over competitive devaluation and mitigating implied vols (risks) of EM Asian currencies including the Indonesia Rupiah, according to the latest research report from Scotiabank.
The yield advantage of the IDR-denominated government bonds will continue bolstering the high-yielding currency, with taking into account more than USD16 trillion of negative-yielding debt around the world.
Meanwhile, the BI remains on track to deliver more rate cuts going forward, which will prompt foreign investors to raise their positions in Indonesia government bonds. Overseas investors have purchased a net USD7.71 billion of Indonesia government debt year-to-date.
The IDR has been running a tight correlation with the 10Y Indonesia government bond yield, but remains vulnerable to capital flight as portfolio investment inflows play a substantial role in financing Indonesia’s current account deficit and can be withdrawn at a short notice.
According to the BI data, about 38.7 percent of total outstanding Indonesia government bonds are owned by foreign investors. US President Donald Trump's chief economic advisor Larry Kudlow said on "Fox News Sunday" that Washington and Beijing are working actively to revive negotiations aimed at ending the trade war that has rattled world markets and that more teleconference meetings with Chinese negotiators are planned over the next week to ten days, the report added.
Kudlow added that "if those deputies meetings pan out, as we hope they will, and we can have a substantive renewal of negotiations, then we are planning to have China come to the US and meet with our principals to continue the negotiations and the talks."
"We stay bullish on the IDR in the medium term and would like to rebuild a short USD/IDR position with a target of 13,900 and stop of 14,500, after taking profit on our previous short USD/IDR position at a trailing stop of 14,000 on July 24," Scotiabank further commented in the report.
Meanwhile, Fed Chairman Jerome Powell’s Jackson Hole speech on monetary policy is due at 10pm HKT on August 23. It would spark risk appetite should Powell change his wording to concede the July rate cut is the beginning of a major easing cycle.
