Emerging countries, including Indonesia, must brace for a currency depreciation and the ensuing capital flights. (Antara Photo/Rivan Awal Lingga)

Investors Rattled as Trade War Morphs Into Currency War


AUGUST 06, 2019

Jakarta. The trade war between the United States and China has turned into an escalating currency war and emerging countries, including Indonesia, must brace for a currency depreciation and the ensuing capital flights.   

The rupiah is now traded at 14,300 against the greenback, having fallen 0.7 percent so far this week as the tit-for-tat between the US and China continued.

China announced it would stop importing US agricultural products until an indeterminate time after President Donald Trump said he would impose additional tariffs on $300 billion worth of imported goods from China. 

The yuan traded below 7 per US dollar for the first time since 2008, prompting the US Treasury to call China a "currency manipulator," a designation it had last used in the 1990s on any country.

"As part of the yuan's trading block, Asian currencies are squeezed by a stronger dollar and a weakening yuan. Emerging market assets run to safe-haven assets like the yen and the US dollar," Adrian Panggabean, Bank CIMB Niaga's chief economist, said on Tuesday. 

"Since 2008 the yuan has become an anchor for the currencies of developing countries. The weakening of the yuan must be watched closely because it could drag the rupiah down," Adrian said. 

He said market players must stay vigilant for the rest of the week as the volatility is expected to remain. 

"We have seen an outflow in Indonesia's equity market and a slowdown in inflow in its bond market," Adrian said. 

"Personally, I hope there is no reversal. From currency and valuation point of views, Indonesian market assets are still very attractive regionally and globally," he said, adding that the market had already priced in Indonesia's disappointing second-quarter growth.

"What the market did not expect was the global situation," he said.

The Jakarta composite index closed 0.9 percent lower on Tuesday, extending a loss since Friday. Foreign investors sold shares worth Rp 2.2 trillion ($154 million) more than they bought.

Coordinating Minister for Economic Affairs Darmin Nasution said the government will wait and see how far the rupiah would fluctuate. 

"We're following [the development], we're doing our calculations but we don't want to comment about it yet," Darmin told Antara news agency. 

"No need to [exaggerate the issue] now. This is all part of a process that is still going on. Everyone has been making their move. Who knows what action the US would take tomorrow?" he said.

Martin Petch, the sovereign risk group vice president at Moody’s Investors Service, said he saw a hardening of positions between China and the US that is likely to spill over to the rest of the world, particularly Asia. 

"At this stage, we do not expect the US Treasury designation to have a material impact on China's foreign exchange policy. However, market expectations of potential further yuan devaluation may lead to devaluation in other currencies, particularly those with strong trading ties to China," Petch said.