Singapore. The Indonesian rupiah recovered after falling to a four-month low on Thursday (02/06), hit after Standard & Poor's denied the country a coveted investment grade status, although the decision did not significantly deter appetite for local bonds.
Most emerging Asian currencies rose on the dollar's broad weakness with the Japanese yen jumping after Prime Minister Shinzo Abe announced a delay in a sales tax hike by two and a half years, sparking safehaven flows to the Japanese currency on concerns about the effectiveness of Abe's economic policies.
The rupiah earlier slid 0.3 percent to 13,698 per dollar, its weakest since Feb. 9, before briefly ticking up in the afternoon.
S&P on Wednesday said a low per capita gross domestic product and worsening corporate credit quality cast a shadow over its sovereign credit profile. It affirmed Indonesia's rating at one notch below the investment grade with a "positive" outlook.
"The impact of this rating decision should be temporary as we still expect a few positive catalysts in the bond market," said Suhardi Tanujaya, senior investment manager for Aberdeen Asset Management in Jakarta.
"The tax amnesty bill would have a bigger impact on rupiah currency and bond market... We are quite optimistic that the parliament will pass this bill."
Indonesia's government plans to offer low rates for taxpayers who declare untaxed assets at home and abroad, which the finance minister estimates will boost Indonesia's tax revenue by an additional Rp 165 trillion ($12.1 billion).
The programme faces another delay as lawmakers still need to agree on tariffs, two parliamentary members said last week.
Tanujaya said the implementation of an interest rate corridor from August and possible elimination of the withholding tax on local currency government bonds also provide "good support" to the market.
Bond prices up
Reflecting such views, most Indonesian government bond prices rose on Thursday. Foreign investors bought them on dips, overwhelming "panic selling" from local investors, traders said.
Some investors had expected S&P to upgrade the country's sovereign rating in its latest review as the firm is the only major rating agency that has not given Indonesia an investment grade.
Indonesia's bonds are also likely to find support from appetite for high yields, especially once the US Federal Reserve's interest rate hike materialises, analysts said. The country's debts provide one of highest returns in Asia with the 10-year yield at 7.85 percent.
"The rupiah-denominated bond's attractiveness is its high-yield and markets hope for more monetary policy easing," said Qi Gao, an emerging Asian currency strategist for Scotiabank in Hong Kong.
"If the Fed's tightening concerns fade, we could see foreigners buying local bonds."
Last week, Indonesia's central bank governor said Bank Indonesia may ease monetary policy again in June to stoke a slowing economy.
Most Asia currencies up
Most emerging Asian currencies rose as the dollar slid against a basket of six major currencies. In addition to the yen's strength, the greenback came under pressure from some uncertainties over an imminent Fed rate hike.
South Korea's won led regional appreciation as local exporters sought the currency for their settlements. The Malaysian ringgit failed to join the move, hitting a three-month low, as weak crude prices underscored the country's falling oil and gas revenues.
The ringgit fell as much as 0.7 percent to 4.1720 per dollar, its weakest reading since March 1.
"Our cyclical driver for the Malaysian ringgit remains negative against the US dollar. In short, the fundamental outlook for the Malaysian ringgit remains challenging," said Heng Koon How, a senior currency Strategist for Credit Suisse Private Banking Asia Pacific, in a note.
As the ringgit weakened past 4.1600, the 50 percent Fibonacci retracement of its appreciation from September to April, the momentum on the current depreciation hints of a test of a 200-day moving average at 4.1843 fairly soon, analysts said.