As we are in the middle of the fourth quarter of 2017, we detect rising pressures on the Indonesian rupiah exchange rate amid broad US dollar strength. However, the decision of Indonesias central bank to leave its interest rate regime unchanged at the November meeting managed to give some support to the rupiah (as well as Indonesias improving balance of payments, current account deficit, and capital and financial account).

But despite positive domestic factors, there are plenty of external factors that put pressure on emerging market currencies. Problematically, these external issues are much more influential than domestic factors.

While the rupiah remained stable against the US dollar in the first nine months of 2017, there occurred significant rupiah weakening (in line with the overall performance of emerging market currencies) from mid-September 2017. However, the rupiah has been among the most-affected Asian emerging market currencies since mid-September (together with the Philippine peso and Hong Kong dollar). This is related to the (net) capital outflow that has occurred so far this year.

Issues that have caused a strong US dollar over the past months are growing expectations of another Fed Funds Rate hike before the end of the year, US President Donald Trumps plans for tax reform, the unwinding of the Feds USD $4.5 trillion balance sheet, and Trumps nomination of Jerome Powell to serve as the next Fed chairman. Meanwhile, there still exists concern that geopolitical turmoil can flare up anytime in North Korea and Spain.

Therefore, the rupiah is expected to remain under pressure in the remainder of 2017 although positive domestic factors will limit the degree of weakening. Moreover, another Fed Funds Rate hike (possibly in December) is assumed to be priced in already and therefore will have limited impact on the rupiah. US tax reform is more likely to have a big negative impact on the rupiah. However, it remains to be seen whether tax reforms can be realized in the USA.

In 2018 the rupiah is likely to remain under pressure too as the Fed is expected to implement two more rate hikes. A positive matter, however, is that Jerome Powell seems not too hawkish. However, it remains to be seen whether Powell can communicate Fed policies clearly to markets in order to prevent shocks.

Source : Indonesia Investments

Nov 18, 2017