The Indonesian rupiah exchange rate depreciated 0.07 percent to IDR 12,099 per US dollar on Thursday (26/06) based on the Bloomberg Dollar Index, thus extending its recent weakening trend. This trend is expected to continue further as Bank Indonesia said it would allow rupiah depreciation in order to make the country’s exports more competitive (in an attempt to curb the current account deficit). However, this also dampens demand for Indonesian bonds. The 10-year yield rose to the highest level since February 2014.
Concern about consumer price gains increased after Bank Indonesia said to expect higher inflationary pressures in the second half of 2014. Factors that can cause considerable inflation are the El Nino cycle, which is expected to make its impact felt in the months ahead (particularly impacting on rice and other agricultural commodities), higher electricity tariffs, as well as higher prices of transportation and 12-kilogram LPG cylinders.
Other factors that put pressure on the rupiah are concerns about Indonesia's widening current account deficit, political uncertainties ahead of the presidential election, and violence in Iraq. Click here to read more about these topics.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.53 percent to IDR 12,091 against the US dollar on Thursday (26/06).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
For Mandiri Manajemen Investasi, one of Indonesia’s largest mutual-fund managers, the weakening rupiah is a reason to shift its focus to agricultural exports, particularly palm oil exporters as a weak rupiah boosts exports. Moreover, the fund manager believes that commodity prices have already bottomed. The Jakarta Agricultural Index tends to rise when the rupiah depreciates significantly. Therefore, “the commodity sector has been treated as a hedge for the strengthening of the dollar”.