Indonesia rupiah swoons to 17-year low

Indonesia's rupiah has been hit by a wave of selling following comments by the country's central bank governor that inflation will slow -- and it looks as though there's no near-term end to the fall, analysts say.

"The excitement over President Joko Widodo's election in 2014 couldn't last," said ANZ senior FX strategist Khoon Goh. "And now that the central bank has essentially endorsed a weaker rupiah, the momentum points to further selling (of the Indonesian Rupiah)," he said.

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On Friday afternoon, Bank Indonesia Governor Agus Martowardojo said consumer prices were likely to fall by 0.2 percent on a monthly basis, blaming a combination of lower fuel and stable rice prices.

The rupiah ran into some heavy selling after the comments, shedding 0.58 percent in 60 minutes and is trading now at 12,290 against the U.S. dollar, at its weakest level since July 1998.

"The central bank is probably comfortable with the rupiah in the 13,000 range, but a bigger sell off could trigger capital outflows," said Macquarie head of strategy, fixed income and currencies Nizam Idris.

The comments are putting further pressure on the rupiah. The rupiah lost 0.56 percent on February 17 after the central bank surprised with a 25 basis point benchmark interest rate cut, to 7.50 percent. The rupiah fell 0.81 percent between then and Friday's latest central bank surprise.

At the same time, the central bank admitted inflation would slow by the end of the year to lower end of its target 3 to 5 percent range, according to a Reuters report.

Buying Widodo's rupiah

In days running up and after the elections on July 9, Indonesia saw a flood of capital inflows.

The rupiah gained 4.88 percent to touch 11,495 against the U.S. dollar in the 20 days between June 25 and July 23. Since then, the rupiah has trended weaker as the excitement over Widodo's election faded, said Goh.

But with the current account deficit running at 3 percent of gross domestic product, "the inflows weren't sustainable," he said.

Goh has a target of 13,250 rupiah against the U.S. dollar, originally for the end of 2015.

Not only do investors have reason to sell the rupiah, but the dollar's strengthening momentum remains sold, he said. The dollar index has been perched at 12-year peak since last year.

"We could get there earlier of if the U.S. dollar continues to strengthen – particularly if next week's non-farm payrolls are strong," he said.

But a fall to the 13,200 rupiah level "could prompt foreign investors to start hedging their local currency assets and provoke a vicious cycle of capital outflows", warned Macquarie's Idris.