A Three Dimensional Approach To Forex Trading by Anna Coulling

Author:Anna Coulling [Coulling, Anna]
Language: eng
Format: epub, mobi
Tags: forex trading
Publisher: Anna Coulling
Published: 2013-05-19T22:00:00+00:00

Fig 14.13 USD/Indonesian Rupiah

Throughout 2009, 2010 and for much of 2011, investors and speculators were bullish on the rupiah, buying and investing for better returns and yield. Then towards the middle of 2011, sentiment changed towards the currency, triggered by concerns that the central bank would be looking to cut interest rates.

Initially, there were two rate cuts, the first from 6.75% to 6.5%, followed by a second and deeper cut in November 2011, which saw the rate fall to 6.00%. A further cut followed shortly after in 2012, to 5.75%.

This action neatly encapsulates the problems for the central bank which is constantly walking a tightrope of trying to support exports, deliver a stable economy and a stable currency whilst simultaneously keeping inflation in check, whilst simultaneously trying to protect the currency from attack by currency speculators.

It is a fine balance to strike and, for forex traders, the issue is whether interest rates are likely to rise in the medium term, attracting money flows back into the country with a consequent reversal in the current downwards trend against the US dollar.

Much will depend on whether there is an escalation in competitive devaluation (aka currency wars) and, in an increasingly competitive world, central banks are constantly under pressure to protect their home markets. Japan and China are classic examples, Indonesia is now another. If it is to maintain growth and remain competitive with its nearest neighbours, the bank has little room for manoeuvre.

The problem is made worse for the bank with Indonesia’s huge market share for base commodities such as coal and tin, along with palm oil. Indonesia dominates the market for thermal coal supplying over 30% of world demand and since the accident at the Japanese nuclear plant, demand for coal is set to increase in the short term, as many governments delay plans to implement nuclear fuel as an energy solution.

Indonesia's market share for tin is even higher at almost 40% of world demand, an extraordinary percentage. The country is also rich in bauxite, copper, gold and silver. The problem with coal and tin, is that it is difficult to increase these markets in any meaningful way, given the dominant market share already commanded. This simply adds to the problems for the bank. Whilst rising commodity prices are good for major exporters such as Indonesia, this is reflected in inflation and, whilst the country is a net exporter of base commodities including oil (although now in decline), it is a net importer of basic soft commodities such as rice, and other staple foods. It is these prices which feed through into inflation, so starting the cycle once again.

This then is Indonesia – a fascinating country in every respect and the key to trading its currency is to understand the complex relationship between the central bank, inflation, interest rates, its export driven economy which is underpinned by commodities, along with the sentiment of the carry trade speculators. As always, with an 'exotic' currency, there are plenty of opportunities, but like many others, the moves in the currency can be volatile.

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