Being A 'Palm' Reader May Help Understand IDRUSD

Sometimes, markets can send conflicting signals.

Palm oil and the Indonesian Rupiah are a good example of that today. Indonesia is the world's largest producer of palm oil and while it didn't expect to ramp up production of palm oil that significantly this year, it remains an important piece of that country's economy.

With China as one of the two largest global importers of palm oil, concern grew when China signaled a trade deal with the U.S. earlier this year because some believed that some of China's palm oil imports would instead turn into soybean oil imports to satisfy part of that trade pact.

Palm oil prices are down more than 12% on the year and last week alone fell by around 7% (likely more selling pressure connected with the overall economic slowdown seen in China as well because of the coronavirus.

So, why then is the Rupiah up more than 1% this year? Traditionally, palm oil and the Rupiah are fairly strongly correlated, which was the case going into the first week of this month. But that seems to have broken a bit. There haven't been too many interesting signals coming from IDRUSD recently. But there certainly have been from palm oil. The price about a week ago fell below its 50-day moving average. Last week, it touched the 100-day moving average. The (12,26,9) MACD histogram is showing weakness. But the glaring (and confirming strong bear signal) is coming from the Markov regime change process.

Markov looks at volatility and returns over the past 1 1/2 years and generates bull and bear signals. We define a strong bull signal as being one above .8 (on a scale of 0 to 1). And a likewise, a strong bear signal is one being above .8. To get a feel for how the signals are trending, we look at the frequency that a strong bull or bear signal was generated on a rolling basis over the past month. What the associated chart is showing you is that not only were the bearish signals getting louder and louder in February - but as of Friday, Feb. 14, 21 of the past 22 sessions had a strong bear signal ABOVE .8.

All of which could indicate that IDRUSD and palm oil will resume their correlation relationship - and given the negative signals on palm oil, that doesn't bode well for IDRUSD in the near future.