Asian currencies retreated from the week's highs, some from one-year highs against the dollar, on Friday as the US dollar gained reprieve from being sold in broader markets ahead of holidays in Japan and Singapore.
INDONESIAN RUPIAH The rupiah fell to levels around 9,710 per dollar, shedding about 1.5 percent from Thursday's high of 9,560/USD - its highest in nearly a year - in line with the dip in the euro and a broader halt in dollar-selling. Market participants gave varying views on appreciation prospects for the rupiah, which is Asia's top performer this year.
Analysts at Morgan Stanley cited the highly overvalued real-effective-exchange-rate and stretched long positions in rupiah non-deliverable forwards as a reason for the rupiah struggling to rally to 9,500 and beyond. Morgan Stanley's Stewart Newnham and Yee Wai Chong said the rupiah REER was already two standard deviations above its long-term average. "It is the most expensive RRER in Asia ex-Japan," they wrote.
Analysts at J.P. Morgan Chase said the Indonesian propensity for currency substitution will work in rupiah's favour. Onshore investors shifted into foreign currency last year at the peak of the credit crisis and are slowly moving back into rupiah. J.P. Morgan said onshore FX deposits as a percent of total deposits reached a peak of 19 percent in November last year, but that this safe-haven demand had since fallen to 16.7 percent as of May.
"It is reasonable to assume that this ratio could fall yet further to 15 percent, which is consistent with the historical lows that have coincided with dollar/rupiah levels at or below 9,500," J.P. Morgan analysts said in a note. "Such a readjustment in domestic currency portfolios could exacerbate FX market adjustments."
PESO STOP-LOSSES Traders in Manila were puzzled by the peso's sharp moves. The currency initially fell to 47.91 per dollar from Thursday's close at 47.76. Then it rallied to as high as 47.615. Some traders suspected the first wave of dollar selling was after the government released fiscal deficit data, showing the deficit in August narrowed to 22 billion pesos from 34.6 in July.
One trader said the reduction in the monthly deficit caused the peso rally, even though most analysts found it worrisome that the cumulative January-August deficit was 210 billion pesos or 84 percent of the total projected deficit for the year.
Others said the absence of any central bank (BSP) intervention to cap the peso during the first phase of its rally exacerbated the move. "The market was looking at 47.70 as the support and when it broke, market players just sold dollars," said another trader in Manila. "Quite honestly, the market I think was surprised at BSP's absence."
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