Indonesian Rupiah : IDR recovery versus bond outflows – BNY

Geoff Yu at BNY identifies Indonesia as one of the clearest cross-asset signals in Emerging Markets (EM) APAC (Asia-Pacific). Fiscal concerns drove heavy outflows from sovereign bonds and Indonesian Rupiah (IDR) in March, but FX flows have since stabilized while bond flows remain weak. iFlow’s carry index suggests liquidation is slowing, leaving a better tactical opportunity in IDR FX than in Indonesian sovereign credit.

FX carry stabilizes as bond stress lingers

"Indonesia, one of the few clear cross-asset signals."

"Indonesia is one of the cleanest signals in the region. FX and fixed income lined up. Fiscal concerns worsened balance-of-payments stress in March, making that the biggest outflow period for both sovereign bonds and IDR."

"Our data tracked more than $200mn of outflows in March alone, close to 50% of total Indonesia outflows year to date. Hedge ratios on these carry-driven trades are limited because they are expensive, so FX flows were smaller in size."

"Since late May, some divergence has emerged. FX flows have stabilized even as IDR bond flows continue to worsen. Our iFlow Carry index suggests FX carry liquidation is running out of steam, helping IDR recover."

"That leaves a better tactical opportunity in FX than in sovereign credit or duration."