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Rupiah at Asia Financial Crisis Lows, Emerging Markets May Lift USD

Rupiah at Asia Financial Crisis Lows, Emerging Markets May Lift USD

2018-09-03 04:00:00
Daniel Dubrovsky, Analyst
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ASEAN Weekly Outlook – Rupiah, Asia Financial Crisis, Trade Wars, US Tariffs, Philippine CPI

  • Emerging market weakness on Argentina pressured Rupiah as it tested Asia crisis levels
  • The US mulls $200b Chinese tariffs as early as next week, leaving ASEAN FX vulnerable
  • Philippine Peso eyes 2008-high CPI & foreign reserves as central banks combat FX rates

We released our 3Q forecasts for the US Dollar and equities in the DailyFX Trading Guides page

In East Asia, the Indonesian Rupiah caught the attention of markets as USD/IDR tested highs last seen in September 2015. The Rupiah maintained weakness and ended up closing at its highest since 1998, or the aftermath of the 1997 Asian financial crisis. In fact, the MSCI Emerging Markets Index ended the week lower signaling rising concerns from developing nations.

These countries have generally been coming under pressure from global tightening credit conditions. Episodes that enhance their financial vulnerabilities, such as when the Turkish Lira depreciated as Donald Trump pressured Recep Tayyip Erdogan with sanctions, and can spark risk aversion in the markets. This week, concerns stemmed from Argentina as USD/ARS rose almost 20%.

For Indonesia, weakness in emerging markets and the Rupiah might have reflected rising worries about their current account deficit which has remained negative since 2011. A depreciating exchange rate, which has been the case since January, makes paying back foreigners more expensive. This may also trigger capital flows to pour out of the country. On the table below, the latter has been declining since Q3 2017.

Indonesia Balance of Payments Capital and Current Account

For other ASEAN currencies, there was also general weakness. USD/SGD, USD/PHP and USD/MYR rose. Though weakness in the Malaysian Ringgit and the Singapore Dollar were somewhat contained thanks to gaps at the beginning of last week. A rising US Dollar benefited from haven flows given its status as the world’s reserve currency, pressuring most of its FX counterparts.

In the week ahead, trade war fears could yet further add pressure to broad market mood and stocks. US President Donald Trump was reported mulling additional $200b in US tariffs on Chinese imports as early as next week. Given that the latter country will likely retaliate, this could further weigh on ASEAN currencies which seem vulnerable to risk trends. Rising US Dollar prices will also add more pressure.

Meanwhile, the Philippine Peso faces a local inflation report on Thursday. CPI stands at 5.7% y/y in July, the highest since 2009. Economists are anticipating price growth at 5.9% in August, bringing them further away from the central bank’s target which could pressure them to tighten monetary policy. However, keep in mind that they anticipate inflation to slow down in the coming year. We will also get Indonesian CPI data.

Lastly, important pieces of local economic data include foreign reserves from Indonesia, Philippines and Malaysia. Lately, these nations have been spending them to prevent their currencies from depreciating rapidly. As the Rupiah fell to 1998 lows last week, the Bank of Indonesia stepped in with intervention by purchasing 100T in government bonds.

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USD/IDR Technical Analysis –September 2015 High Eyed

On a daily chart, Indonesian Rupiah prices have continued depreciating despite another bearish reversal candlestick pattern. While USD/IDR has closed at its highest since 1998, prices are still short of the September 2015 high at 14,782. This are could still act as near-term resistance, perhaps pausing gains. A break above though exposes the 123.6% Fibonacci extension at 15,003. On the other hand, immediate support appears to be 14,646 followed by the August 21st low at 14,555.

USD/IDR, Rupiah Daily Chart

Chart created in TradingView

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--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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