Indonesia Rupiah Is Attractive Safe Haven

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (BBH FX Strategy) -- The favorite safe havens have been the Swiss franc and the yen, but the policy response has encouraged some participants to look for an alternative.

Earlier this week, BBH Currency Strategy identified the attractiveness of Norway, which is a large net international creditor and has a robust economy.

New oil finds in the North Sea and the national oil company's large stake in new findings in the Gulf of Mexico also underscore the fundamental attractiveness of Norway.

Some investors appear to be increasingly looking at alternatives to the Brazilian real (BRL), which, while not a safe haven, is also seen as a crowded trade. It has benefited from high nominal rates and commodity exposure.

However, the policy response to the BRL's strength and the more general thrust of policy has tempered the earlier enthusiasm and is altering the perceptions of risk/reward.

Indonesia may be an interesting alternative to Brazil and has much to commend itself. It has reported solid growth of around 6.5% in the first half of this year. It enjoys a trade balance, but exports (as a share of GDP) tend to be smaller than other Asian countries, which might offer some insulation from the vagaries of the global economy.

Indonesian inflation was 4.6% year over year in July, down from 7.1% in January and thus back within the central bank's 4%-6% target. The appreciation of the nation's currency, the rupiah (IDR), may have helped temper the price pressures, and the government has also supplemented the domestic rice supply with imports.

The rupiah has appreciated about 5.2% year to date, making it the second best performing currency in the region after the Singapore dollar. In the past three months, the rupiah is essentially flat against the dollar, so the trade does not appear crowded with momentum traders.

The Indonesian two-year note yields about 5.25%. The five-year bond yields a little more than 6%. The five-year credit default swap is priced around 175 basis points. By comparison, Brazil, Mexico and France are around 163 basis points.