Indonesian Rupiah Slips as USD/IDR Nears 17,940

The Indonesian rupiah weakened on Monday, with USD/IDR rising to around 17,940 in European hours. The move puts Indonesia's trade-off between supporting growth and defending the currency in front of FX traders.

Key Takeaways

Rupiah under pressure: USD/IDR gained on Monday after losses the previous day.
Mixed domestic data: Retail sales grew at their fastest pace in five months in August, while September headline inflation hit a three-month high.
Fed pricing: CME FedWatch puts the probability of a Fed rate hike at the December meeting at 84.1%.

What Happened

USD/IDR reversed the previous day's losses as the rupiah struggled with the policy dilemma. Indonesia's foreign exchange reserves dipped slightly, though they remain near a five-month high. Consumer confidence fell back from its recent peak.

The US dollar moved little against its peers. Analysts at MUFG described the major foreign exchange rates as "[having] remained stable overnight." They said the dollar index was "continuing to trade close to year-to-date levels at just above the 102.00-level."

US data added to the picture. The University of Michigan Consumer Sentiment Index fell to 46.3 in October from 48.1, below the 47.6 forecast. CME FedWatch shows a 17.7% chance of a 25bp hike this month, down from 24.4% the previous week.

Background

Indonesia's rupiah is exposed by a persistent current account deficit and tighter global financing conditions. Those factors leave it vulnerable to sudden shifts in foreign capital flows.

Rising food costs are expected to keep upward pressure on prices through year-end. Energy concerns also resurfaced after Donald Trump said he was considering joining Saudi Arabia's military campaign against Houthi militants in Yemen. That followed a deadly attack on Riyadh's international airport.

Market Impact

USD/IDR: Rising inflation limits room for easier policy, while a fading growth signal in consumer confidence limits appetite for tightening. That is the trade-off behind the rupiah's weakness.
USD/JPY: The currency pair extended range-bound trade above 158.00. Softer US bond yields capped it, and there was speculation that authorities could step in to support the yen.
AUD/USD: The pair filled a modest bearish gap but stayed below 0.7000 in the Asian session on thin holiday liquidity. US bond yields pulled back from multi-year highs.
Gold: Gold extended its retracement from a one-week high and touched an intraday low around $4,170.

What to Watch Next

Fed December meeting: Markets price an 84.1% chance of a hike, which sets the backdrop for USD/IDR and other dollar pairs.
RBA November meeting: Odds of another rate hike are diminishing, which bears on AUD/USD.
Food prices through year-end: Rising food costs are expected to keep upward pressure on Indonesian inflation.

Bottom Line

USD/IDR sits near 17,940 while Indonesian data point in different directions. Retail sales are firm, inflation is higher and reserves have eased slightly. Fed pricing for December and the risk of capital-flow shifts are the main external pressures on the Indonesian rupiah.

Indonesian Rupiah Slips as USD/IDR Climbs to 17,940