After the Federal Reserve announced that it kept its key interest rate at the historically low level of 0.0-0.25 percent at the September policy meeting, most of Asia’s emerging market stocks were up on relief that their currencies are not to depreciate heavily (yet) due to the looming rate hike. Yesterday (17/09), the US central bank said it postponed further monetary tightening due to weakness in the global economy, unsettled financial markets, and low US inflation. However, a Fed Fund Rate hike is still likely to occur before the year-end.
The notable exception was Japan’s Nikkei 225, which weakened over one percent in morning trading as the US dollar depreciated against the yen, thus pushing Japan’s exporter stocks lower. However, most emerging market stock indices are in green territory on temporary relief. As these economies are highly dependent on capital inflows to finance economic growth, (the prospect of) higher US interest rates leads to large capital outflows from emerging markets, causing currencies to weaken, their stock indices to drop while bond yields climb.
Nomura Holdings Inc. - quoted by Bloomberg - stated that Indonesian and Malaysian sovereign bonds are bound to benefit the most in Asia from the Fed Fund Rate hike delay as these assets have high foreign ownership.
Despite US interest rates left unchanged, the rupiah remains plagued by depreciating pressure as uncertainty about the timing of the Fed Fund Rate hike persists, while concern about the sluggish global economy continues as well, leading to risk aversion. As such, volatility is expected to continue in the period ahead. Based on the Bloomberg Dollar Index, the Indonesian rupiah had depreciated 0.11 percent to IDR 14,475 per US dollar by 11:20 am local Jakarta time on Friday (18/09). Meanwhile, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) hit a fresh 17-year low as it depreciated 0.08 percent to IDR 14,463 per US dollar.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Indonesia’s benchmark Jakarta Composite Index had risen 0.78 percent to 4,412.52 points just before noon local Jakarta time.
When will the Federal Reserve raise its Fed Fund Rate?
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