Most Asian stock indices strengthened on Monday (26/10) as China cut the one-year lending rate by 0.25 percent to 4.35 percent (the sixth interest rate cut within a 12-month period) and cut banks' reserve requirement ratio by 0.50 percent to 17.5 percent. On the one hand this move should boost economic expansion in the world's second-largest economy. On the other hand, however, the move is one the the many signals that the economy of China is weakening further and heading for a 25-year low growth pace in 2015.
Last week, Chinese Premier Li Keqiang said the country's economy may grow between six and seven percent (y/y) in the coming years. This message implies that the global economy is set to remain sluggish in the period ahead (as are commodity prices) because declining growth in China drags down growth in other Asian emerging markets, while the economy of the Eurozone is recovering at a very slow pace and Japan is still combating contraction. As such, the global economy is still flying on one engine: the USA.
However, stock markets in Asia welcomed the news from China. Last week, the European Central Bank (ECB) already announced that more stimulus is in the pipeline, meaning that more funds are expected to enter emerging markets (particularly as markets expect a delay in higher US interest rates). Indonesia's benchmark Jakarta Composite Index (IHSG) climbed 0.83 percent to 4,691.71 points on Monday (26/10).
Jakarta Composite Index (IHSG):
Although China's monetary easing was welcomed by Asia's stock markets, concern about China's economy led to mostly weakening Asian emerging market currencies (against the US dollar) on Monday (26/10) as investors moved to safer assets. According to the Bloomberg Dollar Index, the Indonesian rupiah depreciated 0.20 percent to IDR 13,648 per US dollar. Meanwhile, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 1.13 percent to IDR 13,643 per US dollar on Monday (26/10).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Furthermore, on Tuesday the Federal Reserve is set to start its two-day policy meeting. Although it is expected that the US central bank will postpone an interest rate hike until next year, the meeting still manages to make some investors nervous. But perhaps the bigger question is whether the central bank of Japan will follow moves taken by the European Central Bank and People's Bank of China and step up its quantitative and qualitative easing programs.
What are the factors that put depreciating pressure on the rupiah?
• Slowing global economic growth, led by China's slowdown
• Persistent low commodity prices
• Uncertainty about the timing of higher US interest rates
• Indonesia's current account deficit