Rupiah Likely to Remain Under Pressure
Broad market trends in the Indonesian rupiah have held relatively consistent over the last year, with a modest devaluation seen against the US dollar. We did see fluctuations in these trends during the summer months but many of these moves came as a result of external influences. One of the best examples here is the media turmoil that posted during this period with respect to a slowdown in the Chinese economy, and this has left many investors wondering whether the rupiah will be able to stand on its own merits and reverse some of its earlier weakness.
The answer to this question is complicated, and revolves largely around the interconnected nature of the modern financial markets. The short version is that this is unlikely, given the fact that we could be on the verge of some very significant monetary policy changes in the United States.
In the chart below, we can see the value of the Indonesian rupiah expressed in terms of the value of the US dollar. Rising chart values suggest that the dollar is strengthening while falling chart values suggest that the rupiah is strengthening.
Chart Perspective: USD/IDR
In the chart, we can see that the broad trend is downward for the rupiah and most of this activity has been propelled by the fact that most of the currency market is bracing for higher interest rates in the United States. Higher interest rates are generally associated with higher currency values, so if we do actually see policy changes this year at the Federal Reserve, we will more than likely see a continuation of this trend in the USD/IDR currency pair.
Of course, nothing is certain at this stage. But if we do see aggressive policy changes in the US, it will be very difficult for the currency markets to sell-off the US currency. The Indonesian rupiah is still viewed as a peripheral asset in these markets, so investors will continue to watch for external influences in order to determine its next likely trend. In addition to this, we have had recent terrorist attacks in the region and this is something that tends to weigh on a currency given the added uncertainty these types of events tend to create.
All of this points to continued weakness in the IDR. So, if you are looking for Indonesian investment vehicles that are likely to outperform, there is an increased likelihood that we will see continued strength in export companies that are able to benefit from falling currency values. These are all factors that are likely to influence Indonesian investment markets over the next several months.
This column was written by Richard Cox, university teacher in international trade and finance, focusing on lessons in macroeconomics and price behavior in equity markets.