BNY’s Geoff Yu flags Indonesia as a clear cross-asset signal in EM APAC, after fiscal concerns triggered sharp withdrawals from both sovereign bonds and the Indonesian rupiah (IDR) in March. Data cited in the note show more than $200mn of outflows in that month alone, accounting for close to 50% of Indonesia’s year-to-date outflows. The report also points to limited hedge ratios on carry-driven positions because hedging costs are high, which kept FX flows smaller than those in fixed income.
Since late May, the pattern has diverged. FX flows are described as having stabilised, while IDR-denominated bond flows have continued to deteriorate. iFlow’s carry index indicates that FX carry liquidation is losing momentum, a dynamic that has supported an IDR rebound and shifted near-term relative value towards the currency rather than Indonesian sovereign credit or duration exposure.
Rupiah Stabilisation and Macro Backdrop
We are seeing one of the clearest cross-asset signals in the region coming from Indonesia. While fiscal concerns drove heavy outflows from both bonds and the Rupiah back in March, a notable divergence has appeared. FX flows have stabilized, but the bond market remains weak.
The recent stabilization in the Rupiah is supported by the latest inflation data released this week. June’s Consumer Price Index came in at 2.8%, below consensus forecasts and comfortably within Bank Indonesia’s target range. This gives the central bank policy flexibility, which is a positive for currency stability even as foreign investors remain hesitant on government debt.
Tactical Opportunities in IDR and Strategy Considerations
This leaves a better tactical opportunity in IDR foreign exchange than in sovereign credit. We believe the selling pressure from carry trade liquidation is mostly exhausted, allowing the Rupiah to recover. Therefore, we are looking at strategies that benefit from a stronger IDR in the coming weeks.
Buying short-dated IDR call options against the USD offers a defined-risk way to play this potential recovery. This approach captures the upside if the currency continues to strengthen while capping potential losses if bond market jitters resurface. This pattern is reminiscent of the 2018 emerging market sell-off, where currencies stabilized well before bond yields began to fall.
For more complex positions, we are considering structures that go long IDR volatility while remaining neutral or short Indonesian government bond futures. This directly plays the divergence between the stabilizing currency and the lingering stress in the credit market. These trades are designed to profit from movement in the Rupiah, without taking a directional view on government bond prices.
