Rupiah to Outperform Other Asian Currencies, State Street Says

By Lilian Karunungan

July 16 (Bloomberg) -- Investors should buy the Indonesian rupiah as the nation's interest-rate advantage attracts overseas funds and commodity exports boost Southeast Asia's largest economy, according to State Street Global Markets.

The currency will rise to the strongest level since June 2007 by the end of the third quarter, Dwyfor Evans, a Hong Kong- based strategist at the unit of the world's biggest money manager for institutions, said in an interview today. Bank Indonesia has countered inflation better than other central banks in the region by increasing interest rates and allowing the rupiah to strengthen, he said.

``It's one of the Asian currencies with the strongest and clearest buy signal at the moment,'' Evans said. The central bank's ``rate-tightening cycle has been a boon in terms of interest-rate differentials.''

The rupiah appreciated about 2 percent over the past month, the second-biggest gainer among the 10 most-active Asian currencies outside of Japan. It traded at 9,133 as of 12:08 p.m. in Jakarta today.

The currency may advance 1.5 percent to 9,000 by the end of September, Evans predicted. Only three of 21 analysts surveyed by Bloomberg have a similar or more bullish forecast.

Indonesia is the world's biggest producer of palm oil and the largest thermal coal exporter. Its total sales abroad increased 31 percent in May from a year earlier, swelling the trade balance to $3.2 billion, double the amount in April, the government said on July 1. Foreign-exchange reserves were at a record $59.5 billion in June.

Volatility Falls

Policy makers will add to this year's three interest-rate increases by raising the benchmark borrowing cost by another quarter-percentage point at their next meeting on Aug. 5, Evans said in a report dated yesterday.

Indonesia's inflation accelerated to 11 percent in June, the fastest in 21 months, after the government cut fuel subsidies. The interest-rate premium over the U.S. benchmark rate stands at 6.75 percent, the widest since 2006.

The rupiah has also gained as volatility fell to near an all-time low, State Street's report said. Implied volatility on one-month dollar-rupiah options was at 5.15 percent compared with 8.75 percent on May 28, the highest this year.

Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of pricing options. Options give the right, but not the obligation, to buy or sell a security at a pre-set time and price.

``The rupiah is no longer one of the more volatile currencies,'' Evans said in the report. It is a ``managed floating currency'' as the central bank has been selling dollars to stem a slide in the rupiah to quell inflation.

To contact the reporter on this story: Lilian Karunungan in Singapore at at lkarunungan@bloomberg.net.