Rupiah may gain further: Analysts

The Jakarta Post, Jakarta

The rupiah is expected to continue its advance against the U.S. dollar this week, although not as strongly as before, analysts are saying, as it begins to run out of last week's steam due to a market euphoria over the Cabinet's new economic team.

"There is still potential for the rupiah to strengthen, but it will largely depend on how the Jakarta Stock Exchange Composite Index performs over the week," analyst Farial Anwar from the Currency Management Group told The Jakarta Post on Sunday.

"The rupiah's gain last week was more because of euphoria (over the Cabinet reshuffle), with nothing fundamental actually taking place to support the rupiah."

The rupiah has continued gaining against the dollar for six straight trading days, closing higher at Rp 9,696 a dollar last Friday, from Thursday's Rp 9,780. This is the rupiah's highest level since June.

It has so far gained by 3 percent since Dec. 2, when President Susilo Bambang first mentioned that former finance minister Boediono -- who is widely-respected for his prudent approach in managing the state budget -- had been invited to join the Cabinet, boosting market confidence toward an improvement in Indonesia's economy, which has recently been plagued by rising inflation and interest rates.

Farial explained that as long as investors are still buying up shares at the local stock market, then the capital inflow would keep on strengthening the rupiah.

He could not say, however, how long this momentum would last, therefore urging the government to act quickly to maintain the positive sentiment.

Farial also warned that the rupiah could take a blow from profit taking by speculators, although he expected the market to remain bullish until it reaches 1,200 points by the year's end. The Jakarta Stock Exchange Composite Index closed 0.2 percent higher to 1,160 points, its highest level in 17 weeks.

"Such incidents of profit taking can already be seen, with the index reaching a mid-day high, but then closing lower due to profit taking" he said. "Fortunately, the markets push to buy shares has outpaced that of profit taking."

Farial went on to say that the rupiah could also slip on such external factors such as the fact that the dollar is at present actually strengthening against other currencies.

Factoring in all these sentiments, Farial expects the rupiah to still trade within the Rp 9,500 to Rp 9,900 band over the week, with a fair chance of testing levels beyond Rp 9,500.

Meanwhile, Bank International Indonesia (BII) chief economist Ferry Latuhihin also said that the rupiah would likely strengthen this week, as investors continue to play out the benefits offered by the local bond market.

"The average yield of government bonds is now 15 percent, while inflation is expected to be at 7 percent by November next year," he said. "There is nowhere else in the world with such gains, so investors are coming here to buy up bonds, thus strengthening the rupiah."

With this, Ferry expects the rupiah to still trade somewhere around Rp 9,700 this week. He also warned of possible profit taking in the market, and expected BI to take necessary monetary policies to prevent other negative affects from the rupiah gaining too fast in such a short period.