IDR: Rupiah Falters, Post-BI Bid Evaporates
The rupiah has weakened anew amidst risk aversion, despite catching a bid yesterday as Bank Indonesia delivered a surprise 25bp hike to the 7-Day Reverse Repo Rate.
- Spot USD/IDR has added 25 figs to last trade at IDR14,863. A clearance of the 50-DMA (IDR14,896) would bring Aug 4 high of IDR14,939 into play. Bears look for a retreat towards the 100-DMA, which kicks in at IDR14,685.
- USD/IDR 1-month NDF last +22 figs at IDR14,883. Bulls see Aug 22/Aug 5 highs of IDR14,953/14,990 as their initial targets. Bears look for a slide through Aug 12 low of IDR14,654.
- The last dovish holdout in emerging Asia fell as Bank Indonesia raised its key policy rate on Tuesday despite signalling earlier this month that it saw no need to rush with hikes. Policymakers revised the inflation outlook higher, across headline and core price indices. The central bank now expects benchmark core inflation to accelerate beyond the target range this year as second-round effects take hold.
- Governor Warjiyo described the decision as a "preemptive and forward looking step to mitigate the risk of rising core inflation and inflation expectations due o the increase in non-subsidised fuel prices and volatile food inflation, as well as to strengthen the rupiah exchange rate stabilisation policy."
- The central bank will also undertake an Operation Twist-style measure to stabilise the rupiah. The Bank will sell more short-term gov't debt in the market, while buying longer dated bonds.
- Kompas cited FinMin Indrawati as noting that fuel subsidy would cost IDR198tn more without a hike in prices as consumption tops target.
- Palm oil futures extend gains, the most active contract trades +MYR63/MT on the day. The aggregate BBG Commodity Index has also edged higher.
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JGBS: Firmer, New BoJ Board Member Address Eyed
JGB futures pushed higher as we worked through the Tokyo morning, although bulls failed to force a break of the overnight session high, leaving the previously outlined technical resistance in place. Local headline flow has been light thus far, leaving wider core FI dynamics and the unwind of an early uptick in crude futures at the fore, providing support for JGB futures, which hit the lunch bell +59.
- Cash JGBs run little changed to ~5bp richer on the day, playing catch up to Friday’s richening in wider core global FI marlets, with swaps lagging across the curve, resulting in a widening of swap spreads.
- BoJ Rinban operations yielded the following offer/cover ratios:
- 1- to 3-Year: 2.66x (prev. 1.20x)
- 3- to 5-Year: 2.86x (prev. 2.27x)
- 5- to 10-Year: 1.52x (prev. 2.25x)
- 10- to 25-Year: 4.85x (prev. 3.05x)
- The BoJ has flagged an impending address from new board members Takata & Tamura (17:00 Tokyo/09:00 London). As noted by our policy team in their most recent insight piece, Takata, most recently an economist at brokerage Okasan Securities, has previously voiced concern over side-effects of powerful monetary easing, although he is expected to side with current policy settings at the upcoming BoJ decisions. Meanwhile, Tamura, most recently a senior adviser at Sumitomo Mitsui Banking Corp, has reportedly voiced concern on the BoJ’s bond market operations distorting markets, but is also likely to support Kuroda when it comes to maintaining easy policy through the end of the Governor’s term.
EUR: Goldman Sachs: Out Of Negative Rates, Into A Growth Crunch
Goldman Sachs note that “ECB officials responded to rising inflation expectations with a surprise 50bp rate hike, flanked by a new “Transmission Protection Instrument” to serve as a backstop for sovereign credit amid higher policy rates. While we continue to think that exiting negative rates could be a significant boost for the Euro over the medium term, the rest of the news flow from last week underscores the challenges facing the currency, and indeed the need for the backstop to be in place so early in the normalization process in the first place. The end of the negative rate era is marked by a clear slowdown in spot activity data (including a rather negative orders-to-inventories mix in the flash PMIs for July), and activity will likely need to be restricted even further despite the partial return of Russian gas flows. Weaker economic activity and the cost of living crunch has helped contribute to significant political uncertainty especially in Italy, which also seems likely to contribute to a difficult investment environment over the next few months. Overall, while the end of the negative rate era should be an important step for the Euro over time, the growth outlook has deteriorated materially over the course of this year, and we think this accounts for much of the recent slide in EUR/USD, so domestic factors will likely continue to weigh on the single currency in the near term. We will closely monitor capital flows in the weeks and months ahead, but it will likely require a brighter investment outlook, in combination with higher policy rates, to make a convincing turn away from parity.”
BOJ: What To Expect From New BoJ Board Members
A quick heads up ahead of this afternoon’s Takata-Tamura address. As noted by our policy team in their most recent insight piece, Takata, most recently an economist at brokerage Okasan Securities, has previously voiced concern over side-effects of powerful monetary easing, although he is expected to side with current policy settings at the upcoming BoJ decisions. Meanwhile, Tamura, most recently a senior adviser at Sumitomo Mitsui Banking Corp, has reportedly voiced concern on the BoJ’s bond market operations distorting markets, but is also likely to support Kuroda when it comes to maintaining easy policy through the end of the Governor’s term.
