While most Asian stocks (as well as US and European stock futures) are in green territory on Monday (21/05) on the back of easing concerns about a potential global trade war (led by the US and China), Indonesian assets remain under pressure. Over the weekend, US Treasury Secretary Steven Mnuchin said the US-China trade war is "on hold" following both sides' agreement to suspend any tariff threats for now. This has a positive impact on global markets.
Although trade talks between the US and China appear to have been successful in terms of progress-making, there remains some vagueness about the exact progress that has been made. Still, markets are generally in a better mood after Mnuchin's statement.
However, Indonesia did not follow suit and continues to be plagued by negative sentiments despite an interest rate hike last week. By 14:45 pm local Jakarta time Indonesia's benchmark Jakarta Composite Index had declined 0.58 percent to 5,751.12 points (down nearly 10 percent since the start of the year).
In the currency market we see continued US dollar strength, hence emerging market currencies, in particular, are under pressure. Hence, the Indonesian rupiah (which is traditionally among the most fragile emerging market currencies) extended its depreciating trend. By 14:40 pm local Jakarta time the Indonesian currency had weakened 0.33 percent to IDR 14,203 per US dollar (Bloomberg Dollar Index), its weakest position since October 2015.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.49 percent to IDR 14,176 per US dollar on Monday (21/05).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Meanwhile, the central bank of Indonesia (Bank Indonesia) said it would conduct three foreign exchange swap auctions this week to safeguard enough rupiah liquidity in the market following its benchmark interest rate hike last week. Last week Bank Indonesia raised its key rate for the first time in four years in an attempt to support the rupiah and curtail capital outflows. However, capital outflows persisted after the rate hike as the hike had apparently been priced in in markets already. This gives rise to expectations that Bank Indonesia may raise its benchmark rate again in the near future.
Last week Bank Indonesia had already conducted two foreign exchange swap auctions. And prior to that Indonesia's central bank had been conducting one each week in April. Rupiah liquidity needs specific attention ahead - and during - the Ramadan and Eid al-Fitr (Idul Fitri) period when demand for cash (rupiah) peaks as consumers purchase various products such as food, clothes, bags and shoes in the context of these Islamic celebrations. In these swap auctions, Bank Indonesia swaps rupiah funds with commercial banks' foreign currency holdings for a period of time. This gives the nation's banking system access to additional liquidity. So far in May 2018, Bank Indonesia sold swap contracts worth almost USD $2.7 billion, mostly with one-month and three-month tenors.
Since the end of March 2018, foreign investors have dumped a net USD $2.3 billion of Indonesian sovereign bonds (causing the benchmark bond yield to touch its highest level in 14 months), and pulled USD $1.3 billion from the stock market.