The rupiah will be driven by several major issues at the moment i.e. (1) US-China trade deal tone; (2) its economic performance since Indonesia is being viewed as an emerging market with relatively more favourable outlook supported by growth stability, added with fiscal and monetary stability; (3) oil prices movement; and (4) the USD outlook with the global monetary policy easing, a less dovish Fed, and Trump impeachment risks.

In the near term, the rupiah could reach 13,950–14,050 should the trade talks between the US and China turn positive. It will mean the yuan/USD will be around the 6.97–6.99 levels. However, if the trade talks continue to drag, the rupiah is likely to trade between 14,100–14,180 against the USD. The yuan is more likely to trade around 7.03–7.05 against the USD.

For 2020, a stronger rupiah against the USD is on the table. We are looking at the rupiah trading between 13,750 and 13,900 against the USD with the yuan strengthening between the 6.93 and 6.95 levels, supported mainly by a successful trade deal between the US and China. The flip side could place the rupiah trade around 14,100–14.250 against the USD with the yuan at the 7.03–7.07 levels against the USD.

A. The development so far

• The yuan’s 7.00 level against the USD was our and investors’ focus over the past few months as the psychological level where the PBoC will intervene.

• At the height of the trade war, the yuan surpassed the psychological level to reach a high of 7.1876 against the USD. During this period, the rupiah reached a high of 14,228 against the USD.

• More recently, the yuan returned to the 7.00 psychological level and closed below the 7.00 handle following signs of reassurance that risk is firmly on and the “phase 1" trade deal is restoring calm to financial markets. In tandem with this, the rupiah gained to close at 13,998. But this was short-lived and the yuan has surpassed the 7.00 psychological level to now around 7.03. In tandem, the rupiah has moved to 14,200.

B. Rupiah drivers...

• The rupiah will be driven by several major issues at the moment:

1. The US-China trade deal tone. Should the outcome turn favourable, the rupiah, which tracks the Chinese yuan fairly closely, will strengthen in tandem with the yuan. The yuan will likely go back below 7.00 against the USD and this should see rupiah also trending below the 14,000 levels against the USD.
2. The economy is being viewed as an emerging market with relatively more favourable outlook supported by growth stability, added with fiscal and monetary stability. It is reflected by the net foreign inflows into its equities amounting to US$3.9bil and US$11.7bil into the bond market as at end October 2019. FDI grew at the fastest pace in four years, climbing by 16.8% y/y to US$17.1bil as of 3Q2019. It marked a second straight quarter of growth and the pace was the fastest since the fourth quarter of 2015.
3. However, the movement of the currency will also depend on oil prices which have a high impact on the rupiah. The rise in oil prices will push up oil import bills and add pressure on the economy. Besides, the movement of the USD will also influence the rupiah. USD support with the global monetary policy easing, a less dovish Fed, and Trump impeachment risks are factors that will influence the movement of rupiah.

C. US-China trade deal a ‘game changer’

• Nonetheless, we foresee stronger values to come from the rupiah against the USD. However, for now, the USD remains the currency to own until the trade deal between the US and China materializes. Despite optimism on the US-China “phase 1” trade deal, we have maintained our cautious view. Risk sentiment will depend on whether the US or China or both decide to play hard ball during the negotiation of “phase 1” deal.

• Should a deal emerge, it would see appetite for risk assets gaining, and the yuan more stable with the USD softening slightly. It will become a potential “game changer”. More so if we thereafter see a potential full-scale deal. Appetite for risk assets will rise, the yuan will stabilize while the USD will soften. It could change the direction of global easing monetary policy and the risk of global recession easing further.

• With the US presidential election on 3 November 2020 and China’s National People’s Congress in 2023, President Xi would not want to see China weaken. Hence, we can expect some “sweetening” with respect to trade deals.

• Besides, we have placed 2–3 rate cuts by the Fed in 2020. This should act positively for the rupiah in terms of interest rate differential. And if the potential leading indicators present a positive economic outlook, the downside risk on the domestic economy will be muted with more upside growth. The political noises are also low in Indonesia.

• On average, the rupiah is seen trading at 14,153, with a high and low of 14,525 and 13,920 respectively. In the near term, the rupiah could reach 13,950–14,050 should the trade talks between the US and China turn positive. It will mean the yuan against the USD will be around the 6.97–6.99 levels. However, if the trade talks continue to drag, the rupiah is likely to trade between 14,100–14,180 against the USD. The yuan is more likely to trade around 7.03–7.05 against the USD.

• For 2020, a stronger rupiah against the USD is on the table. We are looking at the rupiah trading between 13,750 and 13,900 against the USD with the yuan strengthening between the 6.93 and 6.95 levels, supported mainly by a successful trade deal between the US and China. The flip side could place the rupiah trade around 14,100–14.250 against the USD with the yuan at the 7.03–7.07 levels against the USD.

Source: AmInvest Research - 3 Dec 2019