(21 JULY 2017)DAILY MARKET BRIEF 2:Buy high-beta emerging-market currencies such as Indonesian rupiah

As was widely expected the Bank of Indonesia held its key 7day repo rate at 4.75%. Yet the overall effect and tone was slightly dovish. The decision was based on the central banks effort to keep a balanced approach between supporting recovering economic growth and maintaining financial vigilance. On the growth front BI indicated that the economic recovery would decelerated but continue at a decent pace on the back of solid export expansion.

BI forecast anticipated GDP growth at 5.0% to 5.4% in 2017. Despite the stable growth and holiday season inflation remained subdued well within the 4% 2017 target area. In regards to the IDR, the banks was not concerned over recent appreciation as the price movement was due to stable capital inflows. We anticipate policy strategy will remain unchanged with a bias towards easing to support slowing growth for the remainder of 2017. BI decision to not begin slashing rates and overall risk supportive environment should further support our view to be long carry, specifically IDR.

Expectations for a Fed December 25bp rate hike continue to decrease (helped by Yellen’s dovish comments) while the ability for the Trump administration to pass anything of value is in significant doubt. In addition ECBs Draghi was unable to convince the markets that his next more would not be towards normalization which resulted in massive USD selling.
Thin summer trading volume often distorts the meaning of normal market moves, such as the case with the risk of trading today. Yet this would be an opportunity to reload longs on high beta and interest rate EMs for conditions are prime for further upside momentum.