When we look at market activity in the Indonesian rupiah, some very clear trends have started to emerge. When viewed against the US dollar the rupiah has seen pronounced weakness over this time frame. Many investors have started to view this activity as overdone and we have started to see analyst forecasts calling for more strength in the rupiah over the next few months. But there are also arguments that can be made against this outlook and it will be important for those investing in Indonesian assets to understand some of these factors, so that proper positioning can be undertaken.
One potential factor that should have a negative influence on the rupiah is the changing nature of monetary policy in the United States. Specifically, the Federal Reserve (Fed) has made its intentions clear with respect to the need to increase interest rates as the national economy continues to improve. Now that the unemployment rate has dropped to roughly 5 percent, the Fed has the added leverage it needs to start raising interest rates. According to Michael Carney, currency analyst at Teach Me Trading, “increases in interest rates tend to benefit currencies, as there is added yield incentive for investors looking to establish long-term positions in those currencies.” So, if we start to see the Federal Reserve making good on its statements to raise interest rates, the most likely result would be a stronger US currency.
Since the US dollar is the most commonly traded vehicle for buying and selling the Indonesian rupiah, any changes in interest rates could put downside pressure on the rupiah. With this in mind, it should be remembered that changes in monetary policy in the US could keep the downside trend going when we look at the primary direction of the rupiah. Declines in the rupiah suggest reduced buying power for those holding on to Indonesian assets, and this could create a more bearish outlook when we put in place forecasts into the second half of this year.
Next, we will look at some chart analysis in the USD/IDR so that investors can assess the current state of the rupiah relative to the US currency.
US Dollar versus Indonesian Rupiah (JISDOR):| Source: Bank Indonesia
USD/IDR Summary Outlook: Negative momentum in the Indonesian rupiah continues to build over the long-term, and this will likely continue unless we start to see changes in the fundamental drivers.
Chart activity in the USD/IDR continues to show weakness in the rupiah. Valuations in the currency pair have reached highs above IDR 13,000 (per USD) already this year - and this trend will likely continue if we start to see rising interest rates in the US. On the positive side, this type of activity would be beneficial for domestic Indonesian markets as items produced will then be cheaper for foreign consumers. On the negative side, it will be more difficult for Indonesian consumers to purchase foreign products as they will be more expensive.
These are some of the factors that will need to be considered by those looking to establish new positions in Indonesian assets over the next few months. It will be important to continue monitoring chart activity in the USD/IDR as a means for determining where the next trends are heading.