Macro Strategy

BI to remain on the sideline; USD bulls step back for now
Eugene Leow, Duncan Tan21 Feb 2019
    Photo credit: AFP Photo

    Rates: BI to remain on the sideline

    While we do not think Bank Indonesia (BI) is ready to ease, it should not be any impediment towards a further rally in govvies. On the macro front, the policy rate (at 6%) looks too high relative to depressed headline inflation (2.8% YoY in January). However, with the trade balance not showing any signs of improvement, the overarching goal of rupiah stability point to steady policy rates ahead (DBSf: 6% through 2019). In our view, it may take a much stronger rupiah (USD/IDR significantly below 14000) before BI seriously considers the possibility of a rate cut.

    Foreign investors started accumulating govvies again in late 2018 and this trend persisted over the past two months. Foreign ownership grew by almost IDR 40tn since the start of the year, partially accounting for the strong auction results over the past few weeks. Notably, the authorities sold IDR 25tn worth of conventional bonds on 12th February, exceeding the target of IDR 15tn.Front-loading of issuances and lingering election worries mean that the govvie rally has not been as sharp as it could have been. Uncertainty on tax-related issues (including incentives) do not help. We reiterate our running call of going long 3Y govvie (see Macro Strategy, 7th Jan 2019). The 1Y/3Y segment of the govvie curve is still steep and we think that steady monetary policy should anchor inflation expectations, justifying the taking of some duration risks.

    FX: USD bulls step back

    US Commodity Futures Trading Commission (CFTC)’s positioning data shows that speculators have been paring back their bullish USD bets in 2019. USD’s net long aggregate position stood at USD20.2bn as of January 29 versus USD32.0bn at end-2018. The largest shift was against JPY where net longs fell to USD3.9bn from USD11.3bn. With multiple event risks ahead (eg. Brexit, China tariff deadline), speculators probably expect JPY to be well-supported (JPY's safe haven qualities are arguably stronger than USD's). Notably, speculators are extending their EUR net shorts (against USD) at a slower pace in 2019. Though EUR positioning has fallen dramatically over the past year, the current net short position of USD6.7bn is by no means heavy (net shorts reached USD30.5bn in 2015).

    The near-term technical picture for USD has improved after the paring back of bullish bets. Current USD positioning does not look particularly stretched, unlike at end-2018. Even though speculators have turned less bullish on the USD in 2019, the Dollar Index (DXY) has in fact risen by 0.5% which is testament to USD’s relative strength.

    Eugene Leow

    Rates Strategist - G3 & Asia

    Duncan Tan

    FX and Rates Strategist - Asean

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