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Indonesia’s transition to a new government comes at an interesting time, especially when the US Federal Reserve is set to end QE3 at the end of the month.
The country is closely watched with interest, as it’s one of the members of the ‘Fragile Five’, a group deemed particularly vulnerable to the withdrawal of foreign capital.
While Indonesia’s fiscal situation has largely improved since the label, investors’ jitters could still override fundamentals.
There have been some signs of the carry trade unwinding as emerging market currencies start to give up their year’s gains against the greenback. IDR had risen as much as 7.8% during 2014 against USD, but has since retreated to just a 0.62% gain year-to-date.
Indonesia, India eye fuel subsidy cuts
High on Jokowi’s to-do list is a likely cut on fuel subsidies, which should be encouraging news for the rupiah.
This eats up almost a fifth of the state budget, and any relief on this front will help further strengthen its current accounts – in turn providing support for the currency.
Jokowi’s job will be made easier with oil prices pushing four-year lows. Brent is currently hovering around the $85 per barrel level, after losing more than 20% over the past year.
Seizing the opportunity of low oil prices to cut subsidies reduces the risk of public backlash and political pushback.
On this front, Jokowi will be hoping to follow the lead of India’s recently elected Prime Minister Narendra Modi. Over the weekend, Modi lifted curbs on diesel prices for the first time in a decade, part of a wider push to attract investments in the sector.
The rupiah could get a short-term lift from the euphoria due to today’s events. USD/IDR has broken below its recent uptrend line, with a bearish engulfing candle suggesting a further downwards bias.
We are likely to see the pair test the support level of 12,125 points – a 23.6% retracement. A break below this will suggest that the bearish momentum for the greenback against the rupiah will see USD/IDR test the next support area at around 12,000 points – a 38.2% retracement level.