Strong El Nino May Hamper Indonesian Rupiah, Favours Chinese Yuan

ING Bank

In recent times, commodity prices have dropped substantially from the peaks seen during the pandemic. Within South East Asia, the major economies of Malaysia, Indonesia, Thailand and Philippines have large exposures to various commodities that include crude oil, palm oil and coal. 

“We therefore looked at how these commodities would positively or negatively impact the currencies of these countries – Malaysian Ringgit, Indonesian Rupiah, Thailand Baht and Philippine Peso,” said Maybank Research Pte Ltd in the recent ASEAN X Macro Report.

Apart from economic cycles and black swan shocks, changes in climate patterns would affect agriculture sectors and concomitantly, regional forex. The US climate prediction centre sees a plausible El Nino event emerging this year (50% at this point) after three years of La Nina. 

The second half of the report looks into how past El Nino events can impact regional currencies and what forex opportunities can be tapped on. Maybank combed through key commodities (Brent Crude oil, Coal, Crude Palm Oil and Nickel) and came to a conclusion that the outlook for these key commodities could be moderately stable with potential for upside surprise from China’s demand recovery. 

They maintained a constructive view on the Indonesian Rupiah based on their findings. Briefly, the balance of risks for Brent seems even enough to be non-threatening for an oil importer Indonesia Rupiah and potential for higher demand for crude palm oil from China recovery, higher mandatory blend of crude palm oil for Indonesia’s biodiesel is Indonesia Rupiah positive. 

The outlook for coal prices is somewhat tied to natural gas which has been under pressure due to improving supply outlook in Europe. That said, the impact on Indonesia Rupiah from further coal price decline could be mild and unlikely to knock the currency off its pole position within the region. 

Moving on to shifts in climate patterns. An emergence of a strong El Nino would definitely take the shine off Indonesia Rupiah which has been an outperformer year to date. Based on historical monthly data over the past 23 years, India Rupee, Indonesia Rupiah, Philippine Peso, Thai Baht, Singapore Dollar, Malaysia Ringgit, Vietnam Dong and even China Yuan would weaken against the US Dollar in an El Nino event. 

India Rupee and Indonesia Rupiah are most sensitive, possibly due to the fact that their agriculture sectors have higher value add to their gross domestic product. Key produce in these countries (except for Singapore Dollar) are rice producing and rice is a crop that tends to be affected by El Nino. 

Renminbi tends to be a tad more resilient as El Nino seems to have less impact on its rice yield, quite unlike the regional peers which saw rather consistent negative impact on rice production and for other agricultural food crops to varying extent. Indonesia Rupiah have witnessed some impact on its fiscal balance after El Nino events in the past due to severe consequences like drought, food shortages, fire seasons and haze. 

“Philippines also set aside a budget for El Nino events as well and we also witnessed mild impact on its fiscal deficit. Our study above shows that the Singapore Dollar, China Yuan could become possible hedges against an El Nino event. vs. that of more vulnerable Asian peers such as Indonesia Rupiah, India Rupee, Thai Baht and Philippine Peso,” said Maybank.

Previous articleVirgin Orbit Files For Chapter 11 Bankruptcy, Branson’s Seeks Buyer
Next articleVonage Announces AI Acceleration Suite To Simplify, Democratise Intelligent App Development

LEAVE A REPLY

Please enter your comment!
Please enter your name here