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.