Rupiah heads for test of key support as trade outlook darkens

Bloomberg

The rupiah looks poised to test a key support level in the coming months as falling commodity prices, a potential tax on nickel exports and the slow pace of interest rate hikes in Indonesia weigh down the currency.
An earlier-than-expected hike from Bank Indonesia last week did little to support rupiah, with the 25-basis-points increase easily overshadowed by the Federal Reserve’s aggressive moves. The currency is still in a weakening trend towards 15,000 versus the dollar after technical resistance at its 100-day moving average held earlier this month.
“The worsening of the current account balance as commodity demand eases and domestic demand picks up will erode a key support for the currency,” said Divya Devesh, head of Asean and South-Asia FX research at Standard Chartered in Singapore. “At the same time, portfolio flows will likely remain challenged amid global recession concerns.”
President Joko Widodo’s confirmation that Indonesia may impose a levy on nickel shipments adds to the headwinds for the currency and the trade surplus, which contracted to $4.2 billion in July from $5.1 billion in June.
Bank Indonesia’s hike on August 23 was its first since 2018, leaving it well behind the Fed, which has increased its benchmark rate by 225 basis points this year, and is set to rise by another 50 or 75 basis points at its September meeting.
The central bank said it would continue to intervene in foreign exchange markets to stabilise the rupiah in line with fundamentals, which may moderate its weakness. Potential reduction in fuel subsidies could add to Indonesia’s inflation risk, triggering a more aggressive stance from Bank Indonesia, according to Yanxi Tan, a currency strategist at Malayan Banking in Singapore.
This will put consumer price data on Sept. 1 in the spotlight for the currency market.
Yet beyond this, near-term negative risks loom larger for the rupiah. Given recent hawkish rhetoric from the Fed, the dot plot forecasts next month for US rates may be raised higher, spurring a surge in US yields and pushing the dollar up against the rupiah.