U.S. Dollar Gives Up Ground In Asia

With a risk-on mood coursing through the veins in Asia, the US dollar has given ground against both major regional currencies this morning. Notable gainers are the euro and the trade-sensitive Australian and New Zealand dollars, all higher by 0.30% to 1.1280, 0.6960 and 0.6550, respectively.

The Thai baht, Malaysian ringgit and Singapore dollar have all traced out 0.10% gains. The USD/JPY has risen slightly to 107.70 as traders unwind yen haven positioning, although resistance at 108.00 looks insurmountable still in the near-term.

USD/IDR slips on debt monetization

The news is not all positive though, with the Indonesian rupiah falling 1.40% against the dollar, mirroring a similar fall on Friday. The chief culprit is the deal between the Ministry of Finance and the Bank of Indonesia (BI). Last week the Finance Minister announced that the BI had agreed to some “burden-sharing.” It agreed to buy from the Finance Ministry directly, some of the newly issued tranches of bonds to fund Indonesia’s COVID-19 recovery. Without saying debt monetization, that is precisely what it is. That has spooked investors with Indonesia running an extremely delicate balancing act at this stage.

The IDR had staged a miracle rally from mid-March, USD/IDR falling from 16,800 to 13,950 a month ago, helped along by some very serious central bank verbal and physical intervention. Since then, though, USD/IDR has crept back to 14,200 last week, as concerns mounted over Indonesia’s COVID-19 progress and its state finances. The IDR sell-off accelerated last week. USD/IDR has risen to 14,563 this morning, climbing back through its 200day moving average (DMA) at 14,428. USD/IDR looks poised to increase further to 14,800 initially, near to its 100-DMA at 14,900. We fully expect, though, that the BI will intervene aggressively to slowdown any prolonged sell-off in the Rupiah.

Indonesia’s currency pressure highlights how complicated the recovery task of highly indebted emerging markets countries will be. Especially those with sizeable offshore dollar borrowings and a weak current account surplus. Or an outright deficit. Should the global downturn be prolonged, interest rates will have to remain higher than optimal, and countries such as Indonesia will become more reliant on the sentiment of international investors than would otherwise be optimal.

The rupiah aside, though, currency markets in the bigger picture have a summer doldrums look about them still, despite the sentiment driving moves this morning. Currency markets have been reluctant to keep following the FOMO gnomes of Wall Street into new highs territory, and their stubbornness looks set to continue.

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