Indonesia's rupiah weakened the most among Asian currencies on Friday as the central bank's interest rate hike failed to support the local unit as investors remained more concerned about the emerging market's vulnerability. The rupiah and its regional peers have also been hit by the dollar's sustained rally with surging US yields and higher oil prices intensifying pressure on most Asian currencies and other emerging market assets.
The rupiah weakened 0.7 percent to 14,145, despite the central bank's efforts to support the fragile currency and stem capital outflows with a 25 basis points rate hike. Bank Indonesia (BI) Governor Agus Martowardojo, who later this month will be succeeded by Perry Warjiyowere, presented a hawkish tone but investors shrugged off the rate hike and possible further hikes.
"Next month we will have a new BI governor so investors may not be willing to price in this hawkish tone yet," Trimegah Securities said in a note. Due to the rate hike, BI sees economic growth in 2018 weakening slightly but remaining within the 5.1 percent to 5.5 percent outlook. This follows weaker-than-expected first quarter growth reported at the start of May.
Southeast Asia's largest economy has seen $4 billion leave its market over the past month, with its currency losing over 4 percent in value so far this year. "The persistent and rapid rise in US Treasury yields could unnerve sentiment and a subsequent sell-off in regional equities could momentarily threaten the resilience of Asian currencies ex-Japan," said Christopher Wong, a FX strategist with Maybank.
Oil prices firmed on rising demand and ongoing supply cuts by Opec and looming US sanctions on Iran. Brent broke through $80 per barrel for the first time since November 2017 on Thursday. Asia is the world's smallest oil producing region, with countries like India highly exposed to rising oil prices. The rupee slipped 0.4 percent to 67.965.
The Indian rupee has been the worst performing currency in the region so far this year, shedding more than 6 percent, and is set to extend losses for a sixth straight week. "The rupee and Indian bonds have been vulnerable to higher oil prices adding pressures to the current account deficit and inflation," DBS in a note said.
The Malaysian ringgit also weakened to 3.976 a dollar, a day after data showed annual economic growth slowed to 5.4 percent in the first quarter of the year. The currency is on track for a seventh straight week of decline. Uncertainties over the new government's policies are expected to weigh on the country's fiscal position.
However, ING said firmer exports from rising oil prices should support growth.
"We continue to anticipate Malaysia's central bank normalising policy, with a further 25 basis points rate hike in the third quarter," ING added.
DBS said it expects the rupee, the Philippine peso and the rupiah are likely to remain Asia's worst performing currencies this year.
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