Over the past week, the Indonesian rupiah continued to appreciate against the US dollar. Based on the Bloomberg Dollar Index, the rupiah appreciated 0.07 percent to IDR 12,850 per US dollar on Friday (17/04). Only a month ago, investors and policymakers were alarmed when the rupiah touched IDR 13,245 per US dollar, a 17-year low. This column discusses the factors that caused the strengthening of the rupiah in recent weeks. However, amid looming further monetary tightening in the USA, this development should be short-term only.
Developments in the USA heavily impact on emerging market assets including Indonesian assets. Although generally speaking the US dollar has been having bullish momentum ever since the US Federal Reserve started hinting at tightening its monetary policy in late May 2013 (hinting at the winding down of the bond buying program/quantitative easing) and which - after the bond buying program was stopped in 2014 - will be followed by higher US interest rates somewhere this year, in recent weeks weak US economic data have made market participants believe that the US central bank will not raise its key interest rate yet.
Weak US economic data over the past weeks included US housing starts rising less than expected in March, US initial jobless claims increasing well above estimates to their highest level in six weeks, US industrial production falling twice as much as expected in March, disappointing US retail sales, and the Empire State index on manufacturing activity plunging to negative territory in April for the first time since December.
Amid the release of weak US economic data, the Federal Reserve’s latest policy meeting (17-18 March) did not signal that there will be a quick interest rate hike, hence boosting investors’ appetite for emerging market assets such as Indonesian stocks and the rupiah. What the US central bank did indicate was that in case there is an interest rate hike this year, it will be a small hike instead of a sudden jump. Considering that weak US economic data suggest that the timing may not be right yet for a US interest rate hike in mid-2015, investors are starting to expect that the Fed will raise its interest rate environment in late-2015.
The rupiah has also been able to strengthen due to a series of trade surpluses in the past four months. On Wednesday (15/04), Statistics Indonesia (BPS) announced that Indonesia posted a USD $1.13 billion trade surplus in March 2015, almost twice the size that analysts had forecast earlier. However, data also showed that both Indonesia’s exports and imports contracted signalling weaker domestic and international demand (signs of a weakening domestic and global economy).
Still, four consecutive trade surpluses should have a good impact on Indonesia’s current account deficit. Bank Indonesia expects this deficit to narrow to 1.6 percent of gross domestic product (GDP) in the first quarter of 2015, from 2.81 percent of GDP in the fourth quarter of 2014, and significantly lower than Bank Indonesia’s earlier estimate of 2 percent of GDP. This is good news as the current account balance of Indonesia has been one of the country’s main financial instabilities in recent years.
Two other important steps taken by Bank Indonesia to support the rupiah over the past month were its decision to maintain its key interest rate (BI rate) at 7.50 percent (which was likened by markets) and its decision to support the rupiah last month by using its foreign exchange reserves. As a result the country’s foreign exchange reserves fell by USD $3.9 billion to USD $111.6 billion at the end of March 2015. But, at least, it is a strong sign that the central bank is committed to support the rupiah. In previous months, Bank Indonesia had stated that it is comfortable with a weakening rupiah given the worldwide bullish US dollar. Such statements were alarming for market participants holding Indonesian assets.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.19 percent to IDR 12,863 per US dollar on Friday (17/04).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia