Economic Insights

Japan’s exports miss forecast in April

Japanese overseas shipping activities rose to 3.8% YoY in April, lower than the earlier consensus above 5%. However, it largely improved from the 1.1% YoY in March, suggesting that exports continued being boosted by the weakening Yen. Meanwhile, imports unexpectedly grew 9.4% last month, bringing the total trade balance down to JPY-879.9 billion.

Source: Bloomberg, FXPRIMUS

I didn’t expect resilient growth for Japanese exports for the time being, especially in the second quarter, given the dimmed global demand. The substantial global economic slowdown offsets part of the Bank of Japan’s (BoJ) efforts. One good thing for the BoJ is that investors have yet to treat the Yen as a “safe haven” so far, compared to the Greenback.

Sidetracking the exports data, the laggard exports growth was mainly from the currency bloc. Exports to the EU fell 3.5% YoY, suggesting a possible prolonged recession in the Euro Zone, while a growth figure to the U.S. was at 1.5% YoY.

Source: Bloomberg, FXPRIMUS

Indonesia needs macro prudent policy to avoid capital outflow

The Indonesian financial market presented a mixed bag last week; the benchmark equities index rallied more than 1.25% at Friday’s close. However, bonds and the Rupiah continued falling, reflecting the lack of clear progress on cutting fuel subsides, causing the present outflows unavoidable and pushing the 10-year yield to 5.595%.

Source: Bloomberg, FXPRIMUS

In my point of view, the barrier for officials to hike the fuel price in the near term remains high. Even Vice Finance Minister Anny Ratnawati mentioned that the government intends to hike subsidies gasoline by IDR2,000 per liter. From the political prospective, next year’s election limits the chance of the fuel subsidies cut. The Indonesian economic growth in the first quarter also slowed to 6.02% YoY, the slowest pace in two years, lead by fading exports and government spending. The growth rate in the previous quarter was 6.11% YoY.

However, unlike many other nations, a weakening Rupiah does not benefit the Indonesian economy given the low export-to-Gross Domestic Product (GDP) ratio.  The export-to-GDP ratio only stands at around 30%, much lower than its neighbors Singapore and Malaysia. With that said, the main concern in the near term will be largely driven by the progression of fuel subsidies policies and domestic investments. According to the World Bank, the fuel subsidies reached 26% of its GDP in 2012, a substantial amount to widen current account deficits and limit available financing channels. Indonesia’s 2013 budget deficits may arrive at 2.48% of the GDP from the current 2.99%, according to the official’s speech in Jakarta on 20May.

Source: Bloomberg, FXPRIMUS

The fixed income market priced in some higher possibilities for the central bank to raise the interest rate. The central bank already adjusted the yield of instruments from the overnight to 12-month by absorbing excess long-term liquidities, implying the possible rate hike for the Bank Indonesia (BI) reference rate and Fasilitas Bank Indonesia (Fasbi) rate. We expect the central bank to raise the Fasbi floor by 25-50 bps from the current 4% toward the end of the year to boost capital inflow, or minimize outflow at least.

For the USDIDR, I currently prefer a cautious “selling on peak” strategy. The USDIDR’s substantial selling off might only start kicking in until the government officially cuts the fuel subsidies, despite the 9,800 resistance level holding well now. BI targets the inflation in 2014 from 3.5% to 5.5%, from the 5.57% YoY last month.

With that said, there will be a decent chance for the central bank to excise monetary policy tightening in the near term amid the global low-interest rate environment, providing a potential boost for the Rupiah.

On the other hand, the Greenback might continue setting the strengthening tone given the relatively strong recovery in the United States, favored U.S. assets (equities, T-bills) and the possible Federal Reserve’s Quantitative Easing (QE) exit. Hence, the U.S. Dollar appreciation could offset the Rupiah strengthening as well.

From the technical analysis, the coming resistance level for USDIDR might stand at 9,800, and the level of 9,600 provides some support here.

Source: Bloomberg

Previous Daily Market Report: Daily Market Report for 21 May 2013: Momentum for Strong Greenback & U.S. Equities Will Likely Continue