Emerging markets in Asia, including Indonesia, are plagued by sharply depreciating currencies on Friday morning (11/11). Demand for the US dollar is high on the "Trump effect". With a Republican-controlled US Congress and pragmatic businessman Donald Trump in the White House, markets have become positive about US economic growth in the years ahead. Meanwhile, it feeds the likelihood of faster and more frequent Fed Funds rate hikes during Trump's administration. The Indonesian rupiah was down 5.53 percent to IDR 13,865 per US dollar by 09:18 am local Jakarta time (Bloomberg Dollar Index).
Today the rupiah is headed for its biggest daily decline since September 2011. The currency of Indonesia is leading declines among Asia's emerging market currencies. There exists high demand for US dollar, while US bonds yields are soaring. What explains this performance?
Markets expect to see big changes with Trump in office and a Republican-controlled Congress:
- Quicker and more frequent rate hikes by the US Federal Reserve
- Rising US government spending and inflation
- Tax cuts and the implementation of pro-growth policies
- Trump's protectionist approach will protect the US economy, especially the old economy
Markets now see a 84 percent chance of a Fed Funds Rate hike at the December 2016 policy meeting (tighter monetary policy in the USA is expected to lead to capital outflows from the more lucrative, yet riskier emerging markets). Meanwhile, the crude oil price slid below the USD $45 per barrel mark on rising skepticism about the Organization of the Petroleum Exporting Countries (OPEC)'s ability to re-balance crude oil supplies through an oil production cut. OPEC will meet on 30 November 2016.
The rupiah suddenly somewhat improved from IDR 13,865 to IDR 13,646 per US dollar due to intervention by Indonesia's central bank (Bank Indonesia). However, shortly after this intervention the rupiah started to depreciate rapidly again, implying that Bank Indonesia will need to "burn" more foreign exchange reserves to stabilize the rupiah. Nanang Hendarsah, Head of Financial Market Deepening at Bank Indonesia, said the rupiah depreciated sharply after several short-term investors "rushed to the non-deliverable forwards market to hedge, causing the contracts to drop significantly".
Meanwhile, Indonesia's benchmark Jakarta Composite Index was down 2.57 percent to 5,310.26 points by 09:25 am local Jakarta time due to the weak rupiah. Japanese stocks are the exception as they rise on yen-weakness (lifted by export-oriented shares).
Indonesian stocks may also be under pressure due to Donald Trump's eagerness to exit the Trans-Pacific Partnership (TPP) deal. Although Indonesia has not joined the TPP trade deal yet, Indonesian authorities had the intention to join within a couple of years as it would be a good deal for Indonesian exporters.
Overnight (10/11), the US Dow Jones Industrial Average touched a record high, supported by rising shares of banks and financial institutions (on expectation that Trump will deregulate the US banking sector). The Nasdaq Composite, however, declined. This discrepancy between the performance of the Dow Jones and Nasdaq is attributed to markets' expectation that Trump will be eager to support the old economy. On Thursday (10/11), the Dow Jones was up 1.2 percent, the Standard & Poor's 500 index gained 0.2 percent, while the Nasdaq fell 0.8 percent.
Shares of tech giant Apple Inc plunged 2.79 percent, while the so-called FANG stocks (Facebook, Amazon, Netflix and Google parent Alphabet) were also plagued by sharply declining shares. losses. Prospects of higher US interest rates especially impacts on FANGs because these stocks are considered overvalued and higher interest rates are likely to expose this. Apple can be negatively affected by changes in US trade policies. Meanwhile, banking stocks soared as Trump may dismantle the Dodd-Frank Act.