Fiscal pressures and external risks weigh on Indonesian Rupiah

• Higher oil prices, volatile export receipts and changing overseas demand are straining fiscal stability, leaving the Indonesian Rupiah weaker amid market caution.
• To underpin 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.

At around 18,190 in early European trading on Tuesday, USD/IDR is advancing for a second consecutive day. Broad-based caution is weighing on the Indonesian Rupiah (IDR), with higher oil prices, fluctuating export earnings and changing external demand putting pressure on the fiscal position. Against this backdrop, Bank Indonesia (BI) has reiterated its commitment to closer policy coordination with the government and a balanced policy mix to underpin the domestic currency.

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

Attention is also turning to the US jobs report due later this week, which is expected to provide a fresh assessment of labour market conditions and inform expectations for subsequent monetary policy decisions. With the Federal Reserve retaining its hawkish stance, the CME FedWatch Tool now indicates roughly a 75% probability of a December rate rise after a policy pause in October.

US Dollar expected to hold firm as RBA decision weighs on Aussie

Today’s US midterm election outcome is unlikely to provide a significant catalyst for foreign exchange markets, according to strategists at ING, who say they “don’t expect today’s US midterm results to cause structural shifts in FX.” Nevertheless, they identify near-term political risks for the Dollar, warning that it could come under “some short-term pressure should the Democrats secure both the House (widely expected) and the Senate (close call).”

For Australia, ING notes that “a dovish hike by the RBA has hit AUD,” although its analysts “remain optimistic on the outlook for the currency beyond the near term,” implying that the Aussie’s latest weakness could fade once markets have absorbed the immediate policy surprise.