Indonesian rupiah faces bout of seasonal weakness ahead of Fed-linked rally

Indonesia’s rupiah may be set for near-term weakness before gaining traction as global investors start to snap up the nation’s bonds.

Strategists at Citigroup Inc., Natwest Markets and others see the rupiah trading toward 15,800 per dollar in the second quarter amid seasonal headwinds.

A deterioration in the nation’s balance of trade on increasing imports, along with offshore investors looking to receive dividend payouts, are set to hit the currency. It closed at 15,590 per dollar on Friday.

Indonesia’s trade surplus fell to a six month low in January, driven by higher consumer goods imports ahead of Ramadan. The month-long fasting period begins this week, and will end with the Eid al-Fitr (Haro Raya) celebration on or about April 9.

"Rupiah’s near-term outlook is skewed toward weakness on higher seasonal imports ahead of Ramadan and low export conversion caused by a stronger dollar,” Bank of America strategists led by Claudio Piron wrote in a note to clients. "That may remain the ongoing theme for rupiah in the near term, keeping it under pressure over the next month.”

The nation’s companies will also start paying out dividends, with foreign investors expecting to scoop up $2.4 billion over the next three months, according to Citi. The firm is "biased to fade bouts of outperformance in the rupiah,” given the recent trends, including trade-related challenges, said Gordon Goh, a strategist in Singapore.

Further ahead, the currency is primed for a rally toward 15,350, according to TD Securities - its strongest in six months - as the outlook for the Federal Reserve’s rate cuts soon overshadow the near-term headwinds. This will drive bond-buying with some investors already purchasing Indonesian debt in anticipation of an eventual Fed pivot.

"Bond flows affect the currency meaningfully,” which may start rallying to 15,500 late in the second quarter, said Edward Lee, chief economist and head of ASEAN and South Asia FX at Standard Chartered. "We estimate bond investors are still about one percentage point underweight and will move toward a neutral stance when there’s improved visibility of Fed rate cuts, leading the rupiah to outperform peers.”

Investors are also remaining cautious until there’s clarity on the policies and cabinet makeup of Indonesia’s likely next president Prabowo Subianto, who has pledged to accelerate the nation’s growth to 8% in the next five years. Inflows into assets have been choppy this year, with a net outflow in Indonesian bonds while stock buyers have pumped in $1.2 billion on a net basis.

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