Indonesia's rupiah in tight range as investors brace for rate cut

Indonesia's rupiah was in a holding pattern on Thursday as investors eyed the prospect of a bigger-than-expected interest rate cut later in the day, which could dent the appeal of the high-yielding currency.

Asia's foreign exchange markets were choppy in morning trade, with Korea's won and other regional currencies following China's yuan higher against the dollar, though gains were modest amid prevailing investor caution about the coronavirus.

The rupiah underpeformed, weighed by outlying worries Bank Indonesia may deliver a half percentage point cut later in the day, more than the quarter point cut forecast.

Southeast Asia's largest economy is facing its first outright contraction since 1999, in the second quarter due to restrictions imposed to control the spread of the coronavirus, which poses a dilemma for the country's central bank, who have in the past called for a strong currency.

Traders say the market has largely priced in a quarter point reduction, but there is both speculation the bank could move more aggressively or hold off for now.

"In the event of a larger 50 basis point cut, there could be wobbles in the rupiah depending on the guidance from the BI," said Wei Liang Chang, a macro strategist at DBS Bank.

"Our inclination is to view it as a front-loading of expected rate cuts, with BI likely to stay on hold for the rest of the year. In this case, the market impact should be fairly restrained, with rupiah weakness likely to be transitory."

Bank Indonesia has already cut rates twice this year. A 25 basis point cut to 4.25% would bring the benchmark 7-day reverse repurchase rate to its lowest in two years.

The country's share market, a victim of the wobble in global stock markets in the past week, was also marginally lower in early trade.

More broadly, Asian markets tracked a global pullback as equities investors worried about a fresh wave of coronavirus infections worldwide and the potential for more lockdowns.

Malaysian shares led losses, falling 1.2%, with the Philippines market also down more than half a percent. In currency markets, the Thai baht and the won gained 0.4% each.

"While the big picture outlook remains so uncertain, investor behaviour will tend to be reactive rather than strategic," Paul O'Connor, the head of multi-asset at Janus Henderson Investors said in a note.

Beijing cancelled scores of flights, shut schools and blocked off some neighbourhoods after a new cluster of cases were found in recent days, just as several US states reported a surge in new coronavirus infections.

"Now that the reopening trade is well priced in, markets have to deal with the trickier issue of evaluating what the economic recovery will look like beyond the next couple of months," O'Connor added.