Dollar poised for further gains vs rupiah

Dollar poised for further gains vs rupiah

Benjamin Pedley, Dow Jones, Singapore

While the U.S. dollar is under pressure against most Asian
currencies, it has recovered sharply during the past three weeks
against the rupiah, and technical analysis suggests it could
extend those gains.

The immediate goal for the dollar would be resistance just
under Rp 9,500, with a break above here paving the way for a
massive rally to levels not traded since the Asian crisis.

Late Thursday the dollar traded to a six-week high above key
psychological resistance at Rp 9,000 as foreigners dumped
Indonesian stocks. Bank Indonesia, the central bank, was rumored
to have sold dollars to counter weakness in the local currency,
pushing the dollar back down to Rp 8,960.

But the apparent intervention had a very temporary effect on
the market as the U.S. currency soon resumed its climb and at
0850 GMT (3.50 p.m. Jakarta time) was up at Rp 9,100.

And Bank Indonesia could find it increasingly difficult to
curb weakness in the rupiah if an apparent dollar bullish
symmetrical triangle on the weekly chart is triggered.

A triangle is a continuation pattern, meaning the preceding
trend - dollar gains through early 2001 - should resume after the
price goes through a period of consolidation involving four
reversals of direction within an ever-decreasing range.

In this case, the first direction reversal for the dollar was
in April 2001 from a high at Rp 12,185, the second was from a low
four months later at Rp 8,295, the third was in November last
year from Rp 10,961, and the fourth reversal point came in early
June at Rp 8,448. For the triangle to be triggered, the dollar
needs to end the week above a trendline joining reversal points
one and three that is extended along the x-axis.

The line, which is also three-point trendline resistance,
comes in this week at Rp 9,457. This combination of factors means
that while it might be difficult for the dollar to break above
here initially - it might even be worth selling the U.S. currency
on a first attempt on this level - its destruction would be very
bullish.

An upside target for the dollar is generated by the height of
the pattern, which is the vertical distance between the
aforementioned trendline and reversal point number two, which is
Rp 3,265. Hence, a close this week, for example, above the
trigger point would target a move to Rp 12,722.

Improbable? Perhaps, as this would send the rupiah to a four-
year low, but emerging market currencies in other parts of the
world including Brazil, Argentina, and Turkey are down sharply of
late driven by political worries, and concerns about their
ability to make debt repayments.

Contagion from these economies can affect emerging markets in
Asia, particularly those like Indonesia or the Philippines that
are saddled with massive external debts.

Indonesia's public debt stands at $130 billion.

Argentina defaulted last December on $141 billion in public
debt, the largest default in history, while Brazilian bond
markets have factored in greater than a one-third chance that it
will default on debts of more than $200 billion.

According to World Bank data in 2000, Brazil was the world's
ninth largest economy and Argentina was sixteenth.

Though triangles are generally continuation patterns -
technical theory suggests this is the case around 75 percent of
the time - they can act as a reversal pattern, as evidenced by
the euro's recent recovery to almost parity versus the dollar
from $0.92, and a rebound in the Bombay Sensex.

A fall in the dollar under Rp 8,500 would trigger the reversal
pattern scenario, and point to a move back toward pre-crisis
levels around Rp 5,000.

Aggressive moves in either direction would concern Bank
Indonesia, which has said it's happy with a dollar range of Rp
8,500 to Rp 9,000, signaling it will intervene - as it did
Thursday - if the dollar moves outside these levels.

Bank Indonesia's foreign exchange reserves are healthy, but it
would be unlikely to stand in the way of moves down or up in the
rupiah of this magnitude.

The central bank's foreign exchange reserves rose $444.70
million to $29.28 billion at the end of June from a week earlier
due mainly to a loan disbursement by the International Monetary
Fund. Late last month the IMF agreed to disburse $358 million to
Indonesia under a $5 billion loan program.