Fiscal pressures and external risks weigh on Indonesian Rupiah

• The Indonesian Rupiah loses ground amid cautious market sentiment, as higher oil prices, volatile export receipts and changing external demand strain fiscal stability.
• To support the IDR, Bank Indonesia has reiterated its commitment to a balanced policy mix and coordination with the government.
• President Trump and the Republican Party face mounting political pressure as ongoing conflicts with Iran keep energy prices high.

USD/IDR trades near 18,190 in Tuesday’s early European session. The pair advances for a second consecutive day as broad market caution weighs on the Indonesian Rupiah (IDR). Higher oil prices, unstable export earnings and changing external demand are adding to fiscal pressures. Against this backdrop, Bank Indonesia (BI) has reiterated its commitment to closer policy coordination with the government, alongside a balanced policy mix aimed at supporting the domestic currency.

Prediction markets put the probability of the Democratic Party taking control of the US Senate at 74%, underscoring the high political stakes of the vote. Weakness in the US Dollar (USD) ahead of the US midterm elections could limit further gains in USD/IDR. US President Donald Trump and the Republican Party face growing political pressure from high energy prices associated with ongoing conflicts with Iran.

A roughly 75% probability of a December rate hike, following an October policy pause, is currently priced into the CME FedWatch Tool. The Federal Reserve has retained its hawkish stance. Investors are also focused on the US jobs report due later this week, which is expected to shed further light on labour market conditions and inform expectations for subsequent monetary policy decisions.

US Dollar Resilience Expected; RBA Decision Pressures Aussie

Today’s US midterm elections are unlikely to provide a major catalyst for foreign exchange markets, according to ING strategists, who say they “don’t expect today’s US midterm results to cause structural shifts in FX.” Nonetheless, they identify near-term political risks for the Dollar, warning of “some short-term pressure should the Democrats secure both the House (widely expected) and the Senate (close call).”

For Australia, ING attributes pressure on the currency to monetary policy, noting that “a dovish hike by the RBA has hit AUD,” while its analysts “remain optimistic on the outlook for the currency beyond the near term,” indicating that the Aussie’s recent decline may be temporary once markets digest the immediate policy surprise.