Rupiah and ringgit poised for best weeks in more than a decade

[KUALA LUMPUR] The rupiah and the ringgit headed for their best weekly gains since 2001 and 1998 respectively as Indonesia and Malaysia benefited from rallying share markets, rebounding commodity prices and signs the Federal Reserve won't raise interest rates this year.

The rupiah jumped 3.8 per cent to 13,371 a dollar as of 12:22 pm in Jakarta, taking its advance this week to 9.5 per cent, prices from local banks show. The ringgit surged 2.9 per cent on Friday and 7.3 per cent since Oct 2 to 4.1165. This week's rally came after the Malaysian and Indonesian currencies lost 14 per cent and 9 per cent, respectively, last quarter.

Disappointing US jobs data that pushed back expectations for when the world's largest economy would raise borrowing costs spurred gains in emerging-market stocks and currencies this week and that was reinforced by the overnight release of minutes from the Fed's September meeting. Resurgent oil and commodity prices have also benefited Malaysia and Indonesia, and traders have been unwinding bets that the nations' currencies would keep falling through the end of the year.

"What we're seeing is that people are continuing to cover their short positions in the two currencies," said Divya Devesh, Standard Chartered Plc's Asian foreign-exchange-strategist in Singapore. "It's going to be critical to watch China data because that could be the turning point" and the rally isn't supported by fundamentals, he said.

The benchmark share gauge in Kuala Lumpur has gained 5 per cent this week and the Jakarta Composite Index has surged 9.4 per cent. Foreign funds bought a net US$148 million of Indonesian stocks in the first four days of the week, set for the biggest inflow since April, exchange data show.

Brent crude is up 12 per cent this week, while a Bloomberg index of raw materials has risen 3.6 per cent. Malaysia, Asia's only major net oil exporter, derives about 22 per cent of state revenue from crude, while Indonesia's economy is dependent on exports of coal, palm oil and metals.

The reliance on commodities has contributed to Malaysia and Indonesia being among the worst-affected Asian economies this year as growth in China slowed and the US moved toward raising interest rates. Indonesian exports fell for 11 consecutive months through August, while investor confidence in Malaysia has been shaken by allegations of corruption against Prime Minister Najib Razak.

"What we're having is a magnificent dead-cat bounce," said Michael Every, the Hong Kong-based head of financial markets research at Rabobank Group. "The underlying problems have not gone away in any way, shape or form. We had maybe gone too bearish too quickly before but now we're getting too bullish too fast."

The Fed's September minutes showed officials are concerned about China's slowdown and the risk of the strengthening dollar weighing on US exports.

Indonesian bonds have rallied this week, pushing the yield on the notes due September 2026 down 62 basis points to 8.76 per cent, according to the Inter Dealer Market Association. The 10-year Malaysian yield was steady at 4.13 per cent, prices from Bursa Malaysia show.

The ringgit is still the worst-performing currency in Asia this year with a 15 per cent decline, while the rupiah has dropped 7.6 per cent. Overseas investors pulled around US$2 billion from Indonesian stocks and local-currency sovereign bonds last quarter. Foreign funds have sold a net 18.3 billion ringgit (S$6.16 billion) of Malaysian shares this year.

"Investors are rushing in to buy emerging-market assets that saw the biggest losses," said David Sumual, Jakarta-based chief economist at PT Bank Central Asia. "The gains have been too fast and too steep, so some are bracing for an equally dramatic turn if sentiment were to turn for the worse."

BLOOMBERG