Indonesian stocks and the rupiah performed well on the day that President Joko Widodo announced his cabinet reshuffle, while Japan announced a larger-than-expected economic stimulus package to boost the local economy. The benchmark stock index of Indonesia (Jakarta Composite Index) surged 0.96 percent to 5,274.36 points, while the Indonesian rupiah appreciated 0.29 percent to IDR 13,137 per US dollar (Bloomberg Dollar Index) on Wednesday (27/07). Lets take a closer look.

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Positive sentiments caused by the Group of 20 economies meeting in China have waned, hence most Asian stocks are lower on Tuesday (26/07). Instead, negative sentiments are caused by falling shares on Wall Street overnight as well as the declining crude oil price (touching a near three-month low). Market participants are also in 'wait and see-mode' ahead of the Federal Reserve's July two-day policy meeting (that starts later today) and the two-day policy meeting of the Bank of Japan that starts on Thursday.

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After a five-day winning streak in the post-Brexit era, the majority of Asian shares fell on Tuesday (05/07) as investors are engaging in profit-taking after the recent rally. Not even rising expectation of more stimulus measures from several key central banks around the globe managed to entice investors and boost appetite for stocks. Crude oil also fell on concerns over the global economy. Meanwhile, the safe haven assets gold and Japan's yen strengthened, while government bond yields fall to unprecedented levels. Indonesian markets are still closed for the Idul Fitri holiday (4 - 8 July 2016).

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The central bank of Indonesia (Bank Indonesia) cut its key interest rate (BI rate) by 0.25 percentage point to 6.50 percent at Thursday's policy meeting (16/06). Although the central bank had stated at its preceding policy meeting that there remained room for monetary easing, today's move was a surprise that few analysts saw coming. The 7-day reverse repurchase rate, which is set to become the central bank's new benchmark rate on 19 August, was also cut by 25 basis points (to 5.25 percent) at today's policy meeting.

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It was a bad start of the new trading week. Stocks in Asia were deep in the red due to risk aversion, falling the most in four weeks amid concern about the "Brexit" referendum, uncertainty before this week's central bank meetings in the USA and Japan, falling crude oil prices, and the worst mass shooting in modern US history. Indonesia was among the affected markets; the benchmark Jakarta Composite Index fell 0.84 percent to 4,807.23 on Monday (13/06), while the rupiah only depreciated slightly to IDR 13,298 per US dollar (Bloomberg Dollar Index).

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In line with other markets in Asia, Indonesian stocks and the rupiah continued to rally on Tuesday (07/06) supported by the cautious words of Federal Reserve Chair Janet Yellen in a speech on Monday. Meanwhile, higher commodity prices boost the outlook for those commodity-exporting economies (including Indonesia). Indonesia's benchmark Jakarta Composite Index rose 0.78 percent to 4,933.99 points, while the Indonesian rupiah appreciated 0.80 percent to IDR 13,263 per US dollar (Bloomberg Dollar Index).

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Changing perceptions about US monetary policy have a big impact on Indonesian stocks and - especially - the rupiah, today. According to the Bloomberg Dollar Index, the Indonesian rupiah had appreciated 1.30 percent to IDR 13,418 per US dollar by 12:55 pm local Jakarta time. Meanwhile, the Jakarta Composite index rose 0.52 percent to 4,879.06 after the first trading session on Monday (06/06). What caused this performance? Well, the release of the weakest US jobs data since 2010.

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On 5 June 2016, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website over the last seven days. Most of the topics involve economic matters such as Indonesia's fiscal credibility, inflation, manufacturing activity, the impact of a possible US interest rate hike, credit ratings, slavery, crude oil, and more.

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The Indonesian rupiah experienced a volatile day on Thursday (02/06), touching a four-month low in the morning after Indonesia failed to get investment grade status (yet) from global credit rating agency Standard & Poor's (S&P). However, at the end of the trading day the rupiah had appreciated 0.13 percent to IDR 13,643 per US dollar (Bloomberg Dollar Index). Most emerging Asian currencies appreciated against the US dollar today amid uncertainty about an imminent Fed Funds Rate hike.

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For sure Indonesia's financial system will be affected by the Federal Reserve's decision to implement another interest rate hike, and especially emerging market currencies - including the rupiah - are vulnerable to further monetary tightening in the world's top economy. Most analysts now believe a Fed Funds Rate (FFR) hike could occur in July 2016. In previous rounds of US monetary tightening (QE tapering and the December 2015 FFR hike) we witnessed large capital outflows from Indonesia. What will be the impact of another US interest rate hike on Indonesia?

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In 2013, Indonesia experienced a rough year in terms of stock trading. The world was shocked by Ben Bernanke’s speech in late May 2013 in which he hinted at an end to the Federal Reserve’s large monthly USD $85 billion bond-buying program known as quantitative easing. Through this program, cheap US dollars found their way to lucrative yet riskier assets in emerging economies, including Indonesia. But when the end of the program was in sight, the market reacted by pulling billions of US dollars from emerging market bonds and equities.

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On Wednesday (05/02), Statistics Indonesia (BPS) reported that the economy of Indonesia expanded 5.78 percent in 2013. This result implies that in 2013 Indonesia experienced the slowest pace of GDP growth since its 4.63 percentage growth in 2009. However, this slowing growth was basically self-inflicted as both the Indonesian government and central bank (Bank Indonesia) used various monetary and fiscal policies to curb economic expansion in order to tackle several financial issues.

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The pace of Indonesia's monthly January inflation rate was higher in 2014 than in the same month during the past five years. This relatively high inflation rate this year, recorded at 1.07 percent, was caused by severe rainfall and floods in several parts of Indonesia (particularly in the cities of Jakarta and Manado) amid the peak of the rainy season. These weather-related circumstances impacted on prices of food products as distribution channels were disrupted, thus giving rise to increasing prices. Annual inflation, however, slightly eased.

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The benchmark stock index of Indonesia (known as the Jakarta Composite Index or IHSG) was again affected by profit taking after market participants saw falling indices on Wall Street and in Europe at the end of last week due to various negative sentiments including the Federal Reserve's tapering issue, slowing Chinese manufacturing and the release of several global companies' financial reports that were below expectation. Moreover, the rupiah exchange rate continued to depreciate while Asian indices were down on Monday (03/02).

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Despite the release of positive macroeconomic data on Monday (03/02), Indonesia's rupiah exchange rate depreciated 0.22 percent to IDR 12,240 per US dollar based on the Bloomberg Dollar Index. China’s Manufacturing PMI fell to a six-month low of 50.5 in January and put pressure on stocks and currencies in emerging markets. Moreover, the Federal Reserve's further reduction of its quantitative easing program (to USD $65 billion per month) continues to strengthen the US dollar at the expense of emerging currencies.

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The Jakarta Globe reported that Schroders Indonesia will increase its Indonesian assets by 5 to 10 percent in 2014 as the company expects the country's benchmark stock index (IHSG) to rise amid the legislative and presidential elections that are scheduled for April and July 2014. Schroders is optimistic that growth in Southeast Asia's largest economy will accelerate after the hiccup in 2013 when large capital outflows emerged amid international and domestic troubles. Indonesia's GDP growth is estimated to have slowed to 5.7 percent in 2013.

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Today (27/01), Indonesia's benchmark stock index (the Jakarta Composite Index, abbreviated IHSG) fell 2.58 percent to 4,322.78 points. This sharp decline can only be explained by profit taking amid market uncertainty. As I have reported before, the IHSG is highly susceptible to profit taking when negative sentiments arise in the market. Factors that accounted for these sentiments were the continued depreciation of the rupiah exchange rate and falling Asian stock markets (that were impacted by Wall Street's negative ending last week).

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In the Bloomberg Dollar Index, Indonesia's rupiah exchange rate depreciated 0.47 percent to IDR 12,238 per US dollar on Monday (27/01). The decline of the rupiah was in line with today's trend of weakening Asia Pacific currencies (against the US dollar). Meanwhile, the central bank's mid rate (the Jakarta Interbank Spot Dollar Rate or JISDOR) depreciated 0.17 percent to IDR 12,198 per US dollar. Market participants are concerned about Indonesia's January 2014 inflation and further Federal Reserve tapering.

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In the fourth week of January, Bank Indonesia's rupiah exchange rate (the Jakarta Interbank Spot Dollar Rate or JISDOR) depreciated 0.41 percent against the US dollar. This weakening trend of the rupiah was caused by various factors. Most importantly, the US dollar has been gaining strength against emerging currencies, including Indonesia, as speculation emerged that the Federal Reserve will curtail its massive monthly bond-buying program (quantitative easing) by more than just USD $10 billion per month.

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The Indonesia rupiah exchange rate depreciated 0.13 percent to IDR 12,181 per US dollar based on the Bloomberg Dollar Index on Friday (24/01). Asian currencies felt the impact of a contraction of Chinese manufacturing as HSBC’s preliminary Purchasing Managers’ Index slipped to 49.6 in January 2014. Meanwhile, US existing homes sales in December were best since 2006 while US jobless claims were near a six-week low. These data fuel speculation that the Fed will continue to wind down its bond-buying program.

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