Why the Rupiah Could Weaken in September

The rupiah entered September under pressure after Federal Reserve Chair Kevin Warsh signaled that U.S. inflation remained too high for comfort. Indonesian market analyst M. Nafan Aji Gusta Utama said the currency could weaken against the dollar as investors weigh whether Warsh’s remarks will lead to a U.S. rate increase this month.

“Markets are still debating whether Warsh's signals will actually translate into an interest rate hike in September,” Nafan told Tempo. Warsh made the comments at the Jackson Hole Symposium last week, pointing to inflation above the Fed’s 2% target.

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Markets are still debating whether Warsh's signals will actually translate into an interest rate hike in September.

The Personal Consumption Expenditures price index stood at 3.7% over the past 12 months and 4.1% over the past six months. Warsh also cited a 4.1% U.S. unemployment rate, describing it as historically low and relatively stable. Labor-market turnover has remained subdued, indicating limited movement between employers and workers.

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The rupiah is likely to remain volatile and trade defensively.

Nafan said the rupiah’s direction would also depend on upcoming U.S. inflation and labor-market figures ahead of the Federal Open Market Committee meeting. “The rupiah is likely to remain volatile and trade defensively,” he said.

Pressure could ease if the data show a slowdown or inflation falls faster than expected, reducing expectations for further increases in the federal funds rate. Indonesian government bonds could also become more attractive if Jakarta offers higher yields than in previous issuances. The rupiah closed at Rp17,726 per dollar on Monday, compared with Rp17,655 a week earlier, before Warsh’s Jackson Hole speech.

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As long as expectations of higher U.S. interest rates remain elevated, pressure on the rupiah and government securities should continue to be closely watched.