Indonesian currency hovers near 10-month high, charts suggest more gains

Rupiah has rallied more than 4% so far this year.

The Indonesian rupiah has been one of the strongest performing emerging market currencies but the rally now seems disturbing for authorities as it may well impact the prospects of exporters there.

The USD/IDR pair has fallen to 13,085 in last week, its lowest since May last year, from near 13,645 at the start of this year, translating to a 4.3% jump in the rupiah, which is now the best performer in the region.

Better than expected Q4 growth data and slowly rising crude oil and crude palm oil prices have been contributing to the fundamental strength of rupiah in addition to higher yields for sovereign assets of the largest Southeast Asian economy.

The Bank Indonesia is on a cutting spree, but at 7%, the main policy rate in the country is one of the highest among its peers.

As per 5 February data, the Indonesian economy expanded 5.04% year-on-year in Q4 while data on 1 March showed that year-on-year core inflation has eased to 3.59% in February from 3.62% a month ago and 3.95% in December.

However, authorities may intervene if the rupiah continues north excessively. Indonesia's Chief Economics Minister Darmin Nasution, who said last week that the rupiah should not strengthen above its fundamental value, has already given an indication.

Meanwhile, charts suggest further rallying in rupiah. The USD/IDR pair has broken key support levels recently exposing new stronger targets for the local unit.

The break of 50-period moving average on the weekly chart suggests improved momentum on the downside for the pair and the next target looks like 12,819, which will be 2,000 rupiah off the high recorded by the pair last year. It will match the 38.2% Fibonacci retracement of the 2013-2015 rally in the pair.

On the higher side, 13,241 is the immediate resistance which seems to be a weaker one though. Only a break above 13,565 could weaken the prospects of the rupiah badly.