Indonesia: Rupiah Nears Breach of Support With Palm Oil Ban Hurting Trade

  • The rupiah risks weakening to its lowest level in almost two years as Indonesia’s ban on palm oil exports adds to headwinds from interest rate hikes in the US.
  • The currency fell to a one-year low last week, despite an assurance from the central bank that it would stabilize the currency. Technical support at its Apr 21 low is now in danger and a breach of this level would pave the way for a decline to its Sep 20 low.
  • Investors are watching for further export restrictions and rising demand for the dollar, said Divya Devesh, head of Asean and South-Asia FX research at Standard Chartered Bank in Singapore.
  • He sees the rupiah depreciating to 14,800 to the greenback by the end of Jun 22, from 14,613 on 13 May 22.
  • Palm oil accounted for 1.5% of Indonesia’s gross domestic product in 2021 and the prohibition on shipments could cut USD2bn from the nation’s exports for each month it stays in place, according to estimates from Goldman Sachs Group Inc.
  • Investors will have to look past April’s trade data due this week and wait for May 22 data to get a glimpse of the damage that’s being done to exports. The ban kicked off on 28 Apr 22. The rupiah is hovering near 14,635 a dollar, its Apr 21 low.
  • A breach of that level paves the way for it to fall further with little major technical support until 14,950. Meanwhile, Bank Indonesia is expected to lag behind the aggressive pace of rate hikes from the Federal Reserve.
  • The differing trajectory in interest rates has seen foreign funds net sell about USD4bn of Indonesia bonds in 2022. A weak Indonesian bond auction last week underscored waning investor appetite for the nation’s fixed-income debt.

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