For the first time since July 1998, when Indonesia was still plagued by the Asian Financial Crisis, the rupiah has fallen beyond the IDR 14,000 per US dollar mark. Many analysts had already predicted over the past couple of months that Indonesia’s currency would weaken beyond this ‘psychological’ level as external pressures are simply too high. Since 2013 the rupiah has weakening (against the US dollar) as the US Federal Reserve started preparing for monetary tightening. The recent devaluation of China’s yuan added more pressure.
However, few analysts expect the rupiah to weaken significantly in the period ahead. Any dramatic rupiah weakening from now on (particularly if it flirts with the IDR 15,000 per US dollar mark) would surely mean a great shock and the central bank is not expected to allow this to happen. Today (24/08), Bank Indonesia Governor Agus Martowardojo confirmed that the central bank is actively intervening in the market in order stabilize the rupiah and avert high volatility. He also added that Indonesia is not to participate in any currency war (triggered by China’s recent decision to allow yuan devaluation) as Indonesia depends on primary material exports and therefore does not really benefit from a weaker rupiah.
It is assumed that the central bank of Indonesia is intervening in markets in order to keep the rupiah close to the IDR 14,000 per US dollar mark. For the moment it does not seem to allow any further depreciation.
Besides looming higher US interest rates and China’s yuan devaluation, emerging market currencies are also plagued by the recent collapse in commodity prices. Most emerging markets are highly dependent on commodity exports for their economic growth and with commodity prices having dropped dramatically from a year ago, economic growth slows. Today, commodity markets tumbled in Asia on concern that China’s economic growth is slowing faster than expected. Being a giant (energy) consumer, China’s economic slowdown implies further weakening commodity prices. Today, US West Texas Intermediate and Brent fell to new six-year lows. Apart from crude oil, other commodity prices also weakened, including iron ore, copper, aluminium and coal. With market fundamentals deteriorating these prices are expected to continue heading downward.
Due to persistent negativity JP Morgan cut its Indonesian bond holdings from overweight to sell as China’s recent yuan devaluation worsened the outlook for Asian currencies. With foreign investors currently holding roughly 39 percent (worth IDR 534 trillion) of local Indonesian bonds the sale of Indonesian bonds and the rupiah adds pressures on Indonesian assets. JP Morgan is also concerned about the Indonesian government’s announcement to increase government borrowing by 10 percent (in the 2016 State Budget draft).
By 14:18 pm local Jakarta time, the rupiah had depreciated 0.51 percent to IDR 14,013 per US dollar according to the Bloomberg Dollar Index. Meanwhile, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.74 percent to IDR 13,998 per US dollar on Monday (24/08).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Indonesia’s benchmark Jakarta Composite Index was down 4.01 percent to 4,163.14 points by the same time.