When we look at the long-term activity in the Indonesian rupiah, we have seen a surprising level of strength when viewing the activity seen in recent months. This has been surprising for a few different reasons, as this is not something that can be said for markets in emerging Asia as a whole. This essentially suggests that economic activity in the region has been somewhat disjointed and that trends visible in one country cannot necessarily be expected in another. But when we look at chart activity in the rupiah itself, we can see that the broader trends have started to change over the last two months.
Specifically, the rupiah has reversed course and started to exhibit some relatively extreme weakness against the US dollar.
Trend changes like this are significant, given the interconnected nature of the US and Indonesian economies. After hitting lows in mid-April, the US Federal Reserve began signalling a heightened potential for upside changes in interest policy and this propelled the dollar higher against many of its major counterparts. But since the Fed has not yet made made any concrete changes to its base cash rate, these trend moves will likely continue in coming weeks.
For investors with positions tied to the value of Indonesian assets, this type of change in currency valuation can have two different effects. On the positive side, lower currency values will make Indonesian products cheaper and more attractive to foreign export markets. This could provide a nice tailwind for Indonesian companies that have multi-national exposure and a strong consumer base in the US (where currency values are still rising). On the negative side, assets that are denominated in rupiah will inevitably drop in value as long as the currency is falling. So these are all factors that investors will need to keep in mind before establishing new positions, as some stock sectors will clearly be preferable over others for as long as these conditions exist.
US Dollar versus Indonesian Rupiah:
For those that are looking to enter into stock positions from the long side, it will be important to remember that the current environment is much better suited for those looking to buy into companies with a strong export base. Indonesian stocks tied to companies that are focused on the country’s domestic market are likely to see downside pressure until the rupiah starts to gain a better footing in the open market. Once the Federal Reserve actually pulls the trigger and begins its interest rate tightening program, it is likely that we will see some of the selling pressure in the rupiah start to subside. Until then, prepare for stock market trends that focus on companies able to benefit from weaker currency values.