Can the Indonesian Rupiah withstand foreign outflow pressures amid weaker market sentiment?

• The Indonesian Rupiah comes under pressure as foreign capital exits and the IDX Composite declines.
• To shore up the weakening IDR, Bank Indonesia steps into the spot, NDF and bond markets.
• The US Dollar loses ground as diplomatic initiatives in the Middle East temper expectations of a Fed rate hike.

Pressure on the Indonesian Rupiah (IDR) from possible foreign capital outflows is supporting a recovery in USD/IDR. Following three consecutive days of declines, the pair trades higher at around 18,180 during Friday’s Asian session.

Fragile sentiment continues to weigh on Indonesia’s equity market, with the IDX Composite slipping 1.29% to around 5,030 during Asian trading on Friday. Weaker US stock futures were the main trigger for the decline. They followed a sharp, historic overnight fall in Alphabet’s share price that pulled Wall Street lower and revived wider concerns about returns on substantial artificial intelligence investments.

Persistent political tensions are also adding to Indonesia’s economic strains, with student protests continuing across major cities since early October. Fiscal concerns linked to high oil prices, continued net foreign selling and growing inflation worries ahead of next week’s October inflation release are putting further pressure on the Rupiah. Nevertheless, Bank Indonesia’s renewed pledge to stabilise the currency may help put a floor under it. The central bank has committed to active intervention in the spot, NDF and DNDF markets, alongside targeted purchases of government bonds in the secondary market.

Broader US Dollar (USD) weakness, however, could cap further gains in USD/IDR. Growing optimism about US-led diplomatic initiatives to ease Middle East tensions has reduced demand for safe-haven assets, weighing on the Greenback. With concerns over disrupted oil supplies and energy-led inflation easing, markets have pared back expectations of another Federal Reserve rate hike at its forthcoming December meeting. Traders now assign roughly a 75% probability to a 25-basis-point increase, according to the CME FedWatch Tool, notably below the 84.2% probability a day earlier.

Does the US growth surprise strengthen the case for the Dollar?

Stronger-than-expected US activity adds support to the Dollar’s fundamental position, in the view of Commerzbank’s Michael Pfister. He observes that “yesterday’s US growth figures for the third quarter were a pleasant surprise,” as GDP grew at “3.4% annualised quarter-on-quarter” against a forecast of “3.2%.” Pfister highlights that “the US economy is growing significantly faster than those of all the other G10 countries.” He also argues that, “given everything that has happened this year, it is easy to forget that there has been a strong case for a stronger Dollar in recent years,” with the latest figures reinforcing that advantage as robust US growth sets it apart from its G10 counterparts.