Friday, October 27, 2017

FW: CIMB Tactical View - Indonesia: Diamond In The Rough



  • Amid an ongoing rout, the IDR FX and sovereign bond markets appear particularly attractive, and further Dollar-induced weakness present opportunities amidst increasingly nervous positioning in 4Q17. The Rupiah and its bond market have weakened following USD gains and the spike in UST yields on the back of hardening expectations of a December US Fed rate hike and the progress of tax reform through congress.
  • The IDR which has moved to its weakest level this year, had in previous episodes, retreated and returned to its previous trading levels in quick succession as Rupiah assets become relatively attractive due to a weaker currency.
  • However, key risks remain in the near term, and accumulation ought to be cautious since further opportunities may arise from: (i) sustained USD gains and higher UST yields on the back of a quick passage of a sizeable tax reform which at this juncture looks somewhat tough; (ii) reversal of presently dovish expectations of the US' QE withdrawal should perceptions swing on Trump's choice of the US FOMC head.
  • Over the medium term as reflected in our forecasts, the Rupiah appears well-positioned:
    1. The central bank has indicated caution against further rate cuts in recognition of tighter conditions in developed countries which can induce further instability should monetary policy divergence increase;
    1. Growth looks to be well supported by government fiscal policies, consumption and supportive monetary policy, while continued improvement in global growth could support commodity prices and exports, reflecting continued strengthening of Indonesia's external balances;
    1. Full investment grade rating;
    1. Increasingly attractive returns from Indonesian capital markets resultant from the weaker Rupiah and improved expectations of carry from the rise in bond yields; implied FX volatility has declined alongside the IDR and IndoGB capitulation.



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