Currencies in Indonesia (Rupiah) and Malaysia (Ringgit) have been declining in value over the past year, and the interest rate increases in the US may push them down further.
Recently, the U.S. raised its target federal funds rate to a range of 0.25% to 0.5%, marking its first rate increase since 2006.
Partly due to the rate hike, oil traded lower in the US, with crude oil futures settling to US$35.52 a barrel, down US$1.83, or 4.9%, after weekly EIA crude inventories showed a rise of 4.8 million barrels.
According to Barclays, these two currencies are a little bit more vulnerable to Fed hikes, tightening in dollar liquidity and capital outflows. They also opined that both the currencies may be more susceptible to weakness in 2016.
This is because both countries are commodity exporters. Higher U.S. interest rates are set to boost the US dollar, which will weigh on the prices of dollar-denominated commodities.
Barclays also pointed to concerns over the effect of lower oil prices on the Ringgit and Rupiah. A potential further decline in oil prices from current levels remains the biggest ‘known unknown’ and has the potential to weigh on emerging market assets globally, especially on the commodity exporters of both these countries.
Sharp decline in the prices of these two countries’ commodity exports, have helped to weaken their currencies to levels last seen during the 1998 Asian Financial Crisis. The US dollar has strengthened 24% against the Ringgit and 14% against the Rupiah this year.
Though the Ringgit has weakened in value, the pace of weakness might be more moderate in the coming future. Even in Indonesia, there is some potential upside here. The yield is pretty high and that makes it quite difficult for investors to go short on these currencies.
Bank Indonesia is expected to keep its interest rate at 7.5%, but some analysts are forecasting a cut in January next year.
Westpac Bank opined that pressure on energy prices will be compounded by a mild winter in the US and that will hit both the countries.
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