The Indonesian rupiah depreciated heavily against the US dollar on Friday (20/04) amid the release of positive US economic data, a rise in the benchmark 10-year US bond yields, while the US Federal Reserve may remain on track to push for monetary tightening as concerns about geopolitical trouble and a global trade war ease. Meanwhile, the start of the US earnings season was promising with 88 percent of released reports either meeting or exceeding consensus (so far about 15 percent of US companies have released their corporate earnings reports).
Rising US treasury yields, which are touching four-year high levels, came on the back of rising expectations of higher US inflation after markets saw a rally in oil and metals prices over the past week. Higher inflation in the world's top economy could mean that the US Federal Reserve will speed up the pace of interest rate increases this year.
The Indonesian rupiah weakened 0.78 percent to IDR 13,893 per US dollar on Friday (20/04) based on the Bloomberg Dollar Index. Indonesian Coordinating Economics Minister Darmin Nasution said currency weakness is not limited to Indonesia but most currencies across the world are depreciating amid US dollar strength. The former Bank Indonesia governor advised the central bank to carefully monitor the performance of the rupiah. Meanwhile, Indonesian Trade Minister Enggartiasto Lukita added that a weaker rupiah has both negative and positive effects. For exporters it is positive as Indonesian export products become more competitive. However, for importers it brings additional costs.
Bhima Yudhistira, economist at the Institute for Development of Economics & Finance (Indef), expects the rupiah to continue sliding gradually to the IDR 14,000 per US dollar level by the year-end. Currently markets are speculating about another Fed Funds Rate hike in May 2018. This speculation has already resulted in capital outflows from Indonesia, worth IDR 7.78 trillion (approx. USD $564 million), over the past 30 days. Meanwhile, the higher long-term US treasury yields are causing reduced enthusiasm to invest in emerging markets, including Indonesia.
Yudhistira added that the crude oil price is estimated to rise to USD $75 per barrel due to geopolitical turmoil in Syria. This should add inflationary pressures ahead of the Ramadan month in Indonesia as prices of non-subsidized fuels (Pertalite and Pertamax) rise in accordance to international prices.
Lastly, dividend payouts in Indonesia in the April-May period give rise to high US dollar demand because a significant portion of Indonesian stocks is controlled by foreign investors. This also, traditionally, adds pressures on the Indonesian rupiah in the April-May period.
Other factors that are supporting the US dollar against most other currencies are rebounding US retail sales in March and the weakening of the British pound after Bank of England Governor Mark Carney hinted that the UK central bank may hold off on raising interest rates next month due to a recent run of disappointing economic data. Market expectations for a UK rate rise next month dropped to below 50 percent after his comments, down from above 80 percent earlier in the week.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.19 percent to IDR 13,804 per US dollar on Friday (20/04).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia