Fiscal concerns, regional tensions and stronger USD set to weigh on Indonesian Rupiah

• Rising inflation, fiscal commitments and high oil prices increase risks to the Indonesian Rupiah.
• To keep currency volatility within its tolerance limits, Bank Indonesia continues to intervene in the market.
• Cuts to gas exports to Singapore and expectations for Fed rates leave scope for further USD/IDR gains.

September inflation accelerated to a three-month high of 3.28%, largely reflecting food price increases linked to El Niño and adding to inflation risks in Indonesia. Against this backdrop, USD/IDR is trading near 18,170 in Tuesday’s Asian session, ending a four-day run of gains after retreating from Monday’s near-five-month high of 18,216. Despite the pullback, mounting fiscal concerns leave the Indonesian Rupiah (IDR) vulnerable to further losses. High global oil prices and expensive government initiatives are contributing to these pressures. A proposal to provide free education from primary school through university threatens to place additional strain on a budget already burdened by free school meal programmes.

Despite increased volatility linked to escalating tensions in the Middle East, Bank Indonesia (BI) will continue its intervention strategy, Governor Destry Damayanti said, reaffirming the central bank’s policy stance. BI characterised recent exchange rate shifts as normal market dynamics and confirmed that it continues to participate actively in the market. Another official said Rupiah fluctuations remained manageable and comfortably within the central bank’s tolerance limits.

Recurring haze from Indonesian wildfires and Jakarta’s recent gas export cuts are fuelling geopolitical and economic tensions between Indonesia and Singapore. Against that backdrop, Indonesia’s foreign ministry said it would host Singapore’s top diplomat on Tuesday. To protect domestic supplies, Jakarta cut pipelined gas deliveries to Singapore by roughly 8% from Saturday. The reduction followed warnings by Indonesia’s energy minister that export contracts with uncooperative partners would be reviewed.

Cautious sentiment before Wednesday’s US Federal Reserve policy decision is supporting the US Dollar (USD), potentially paving the way for further USD/IDR gains. Markets generally anticipate unchanged interest rates at the Fed’s October meeting, with another increase potentially under consideration in December. The CME FedWatch Tool currently puts the market-implied probability of an October pause at 89.5%, while the chance of a December rate rise stands at 82.3%.

Dollar expected to weather US midterms as longer-term risks persist

A shift in congressional control would do little to change the longer-term vulnerabilities in the US political landscape, according to Commerzbank’s Thu Lan Nguyen. In her view, the approaching US midterm elections are "likely to be less relevant for USD exchange rates in the short term than the looming shift in power in Congress might suggest." Nguyen also stresses that "the structural political risks facing the Dollar would remain," irrespective of any change in control of Congress.