Asia FX Talk - Rupiah weakness

Ahead Today

G3: US trade balance and initial jobless claims, ECB meeting

Asia: Philippines unemployment rate, Australia trade balance, Taiwan inflation

Market Highlights

Bank of Canada (BOC) cut the policy rate by 25bps to 4.75% at its June meeting, marking the first G7 central bank to make the easing move. Policymakers there are confident that inflation will continue to moderate to their 2% inflation target, so policy doesn’t need to be as restrictive. Moreover, Q1 growth was weaker than their projection. Canada’s headline inflation was 2.7%yoy in April, marking the fourth straight month of a below 3% reading. The ECB will also likely follow to cut rates at its meeting later today, since this has been well telegraphed by ECB officials.

Could the Fed also cut rates this year then? Markets think so, with 2 rate cuts now being priced in. The ISM services PMI rose to 53.8 (>50 indicates expansion) vs. 49.4 in April, suggesting the US economy is still resilient amid elevated interest rates. But signs of economic weakness have continued to creep in. ADP data showed 152k jobs were added in May, smaller than 188k in April and Bloomberg consensus of 175k. The ISM employment sub-component improved but was still in contraction at 47.1, presaging a slowdown in nonfarm payrolls this Friday. Meanwhile, the prices paid component eased to 58.2 from 59.2 in April, and we expect it will likely slow further on the back of falling oil prices. US 10-year yields came off further to 4.29%, S&P 500 index rose more than 1%, while the Dollar was modestly higher.  

Regional FX

The Indonesian rupiah was the worst-performing regional currency yesterday, falling 0.4% to a 4-year low against the US dollar. It is also the second worst-performing currency (-1.6%) in the Asia region over the past one month, after the PHP (-2.7%). Seasonal dividend payout by Indonesian companies and an unwinding of EM carry trade have likely weighed on the rupiah, prompting BI to intervene in the FX market once again. Even positive news that the budget deficit will be capped at 2.82% (down from 3% currently) has no positive spillover effects on the rupiah. We think BI’s willingness to react swiftly to stem rupiah weakness using a range of instruments should help the rupiah. Further signs of weakness in the US economic data could also provide a reprieve. Still, the risk of USD/IDR movement is to the upside, as financial market uncertainty remains high in the short term. But beyond the short-term headwinds, we see the long-term appeal of the currency has increased, driven by EVs (see IndonesiaPulse - Rupiah undergoing a fundamental shift, led by EV - MUFG Research).