The Indonesian rupiah exchange rate and benchmark stock index (IHSG or Jakarta Composite Index) both plunged severely after the US Federal Reserve announced on Wednesday (19/03) to cut another USD $10 billion from its bond-buying program (quantitative easing). Moreover, speculation arose that US interest rates may increase in 2015 (the US central bank had kept interest rates close to zero for over five years to stimulate economic growth). It led to tumbling stocks, bonds and currencies across Asia on Thursday (20/03).

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Global credit rating agency Fitch Ratings reminded the investor community about the ongoing risk of a sudden reversal of capital inflows in Indonesia. In the first two months of 2014, capital inflows have been strong, reaching a total of USD $2.3 billion, a 16 percent increase from the same period last year, backed by renewed confidence in Indonesia's economic fundamentals as the current account deficit and inflation have moderated since the end of last year. However, several risks are looming causing potential volatility of capital flows.

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After recording three months of consecutive trade surpluses at the end of 2013, Indonesia's trade balance slipped back into deficit in January 2014. Indonesia - Southeast Asia's largest economy - posted a USD $430.6 million deficit in the first month of 2014. Exports fell 5.79 percent (year-on-year) to USD $14.48 billion, while imports fell 3.46 percent to USD $14.92 billion. The decline in exports were caused by the implementation of the ban on raw minerals (per 12 January 2014). Mineral ore exports fell over 70 percent (month-to-month).

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Based on the Bloomberg Dollar Index, the Indonesian rupiah exchange rate appreciated 0.15 percent to IDR 11,647 per US dollar on Wednesday (26/02). All through the day, the currency traded within a fairly narrow trading range, possibly due to market participants' wait and see attitude ahead of the release of important US economic indicators. As the US economy is improving and the US unemployment rate is declining, the Federal Reserve may wind down its quantitative easing program in a more aggressive manner soon.

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Indonesian stocks and the country's currency feel the negative impact of the further winding down of the Federal Reserve's bond-buying program (quantitative easing). Yesterday (29/01), it was announced that the Fed will cut the bond-buying program by USD $10 billion to USD $65 billion per month. Among market participants concern emerged about the stability of emerging economies amid the tapering as capital outflows are expected. After opening, the benchmark stock index of Indonesia (IHSG) immediately fell more than 1 percent.

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On Wednesday (29/01), the Federal Reserve (Fed) announced to cut its massive bond-buying program (quantitative easing, QE) by another USD $10 billion after the FOMC meeting, while maintaining interest rates close to zero. Originally, the Fed's QE program, implemented in September 2012, totalled USD $85 billion per month but after the cuts in December 2013 and January 2014, it is now wound down to USD $65 billion per month and if the pace of tapering continues, the program might be over by the end of 2014.

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Asian stocks and currencies strengthened on Wednesday (29/01) after the central banks of Turkey and India tightened their monetary policies in order to attract capital inflows and restore investors' confidence. The central bank of Turkey raised its overnight lending rate aggresively from 7.75 percent to 12 percent on Tuesday (28/01); a measure which managed to calm down Asian markets. According to the Bloomberg Dollar Index, the Indonesia rupiah exchange rate appreciated 0.20 percent to IDR 12,166 per US dollar on Wednesday.

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On Tuesday (28/01), the Indonesia rupiah exchange rate shows a volatile performance. Around 15:30 local Jakarta time, Indonesia's currency appreciated 0.08 percent against the US dollar. Market participants are waiting for the outcome of the Federal Reserve's FOMC meeting held on 27-28 January 2014. Most analysts expect the Federal Reserve to quicken the winding down (tapering) of its quantitative easing program. This program caused a large capital inflow in emerging economies, including Indonesia, in recent years.

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Indonesia's central bank (Bank Indonesia) kept its benchmark interest rate (known as the BI rate) at 7.50 percent in today's Board of Governor's meeting (09/01). The institution decided not to change its interest rate because it estimates that the inflation target for 2014 is not in jeopardy (4.5 percent) while Indonesia's economic growth prospects for 2014 and 2015 remain unchanged. Also the overnight lending facility as well as deposit facility rate (Fasbi) were kept at 7.50 percent and 5.75 percent respectively.

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Ahead of the new year, the Indonesia rupiah exchange rate continues its downward trend on Monday (30/12). Bank Indonesia's Jakarta Interbank Spot Dollar Rate (JISDOR) fell to IDR 12,270 per US dollar from IDR 12,260 on the previous trading day. Due to the improving US economy, the US dollar keeps appreciating against the majority of emerging currencies. At most local Indonesian banks, the rupiah is traded significantly above the psychological level of IDR 12,000 per US dollar.

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Market participants are waiting for the outcome of the Federal Reserve's FOMC meeting, which will deal with the future of the quantitative easing program. The wait and see attitude of investors made the benchmark index of Indonesia (IHSG) fall 1.20 percent to 4,463.25 points. Few big cap stocks were able to rise and although some second liners were up, it was not enough to push the IHSG into the green zone. The rupiah continued to weaken and foreign investors were again mostly selling their Indonesian assets.

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Investors all around the world are in anticipation of the Federal Reserve's decision to scale back the monthly USD $85 billion bond-buying program known as quantitative easing (QE3). If indeed scaled back, then another important question remains: how much will the bond-buying program be toned down? Today (18/09), is the last day of the Fed's FOMC meeting in which these decisions are made. The market expects no drastic end to the program, instead a gradual toning down (between USD $10 to $20 billion) is anticipated.

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After a strong performance yesterday, the Jakarta Composite Index (IHSG) fell 0.10 percent to 4,517.62 points on Tuesday (17/09). Part of the investor community grabbed their chance to engage in profit taking after yesterday's gain but most investors are careful and reluctant to make any major decision prior to the result of the Federal Reserve's FOMC meeting (17-18 September). It is expected that after this meeting there will be more clarity about the future of the Fed's quantitative easing program.

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Rising indices on Wall Street at the end of last week were a major factor behind rising stock indices in Asia, including Indonesia's benchmark stock index (IHSG), on Monday (16/09). For market players this development was a sign to enter the market. Moreover, expectation has emerged that the Federal Reserve will not take any drastic decisions in the FOMC meeting (on 17-18 September) regarding its quantitative easing program. This expectation has calmed down markets. Indonesia's IHSG rose 3.35 percent to 4,522.54 points.

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Last week, Indonesia's benchmark stock index (IHSG) climbed 7.3 percent to end at 4,375.53 on Friday (13/09). This growth is remarkable as it remains unknown what the Federal Reserve will do with its quantitative easing program (QE3). The next Fed meeting - scheduled for 17-18 September - is expected to provide more clarity regarding this matter. Positive sentiments that lifted the IHSG were Indonesia's slightly increased foreign exchange reserves, its stable rupiah after another BI rate hike, and the Bilateral Swap Deals (BSA) with Japan and China.

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It was decided at the Board of Governors’ meeting (RDG) of Bank Indonesia on 12 September 2013 to raise the BI Rate by 25 bps to 7.25%, the rate on the Lending Facility by 25 bps to 7.25% and the rate on the Deposit Facility by 25 bps to 5.50%. This action forms part of the follow-up measures taken to reinforce the policy mix instituted by Bank Indonesia, which focuses on controlling inflation, stabilizing the rupiah exchange rate and ensuring the current account deficit is managed to a sustainable level.

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Although many global indices were up, Indonesia's benchmark stock index (IHSG) fell a total of 2.93 percent during last week's trading. One important issue on global indices is the tapering off of the Federal Reserve's quantitative easing (QE3). On 17 and 18 September, the next meeting of the FOMC is scheduled, which is expected to discuss the future of QE3. Notably, as the meeting comes closer, most global indices in fact rise. Thus, market players seem to have become less concerned about an end to QE3.

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Contrary to Thursday's trading day (05/09) when the benchmark stock index of Indonesia (IHSG) opened strong but ended in the red, on Friday (06/09) it was the other way round. The IHSG started negative but ended the day 0.53 percent up to 4,072.35 points. Factors that made a negative impact on the IHSG were the continueing fall of the rupiah as well as speculation that Indonesia's foreign exchange reserves would decline again at end-August. However, a number of rising Asian indices influenced the IHSG in a positive way.

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Indonesia's main stock index (IHSG) started rather well on Thursday's trading day (05/09) despite the fact that most analysts expected a weakening index. Positive market sentiments were triggered by rising Asian stock indices (brought on by yesterday's rising indices on Wall Street). However, as the rupiah continued its downward spiral, market players began to exit the market, thus resulting in the 0.55 percent fall of the IHSG to 4,050.86. Foreign investors were net sellers of Indonesian assets, while domestic players recorded a net purchase.

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Most European stock indices rose sharply on Monday (02/09) as investors were happy to see favorable industrial data from China and the Eurozone. The benchmark stock indices in Paris, Frankfurt, London and Amsterdam climbed up to 1.8 percent. Trade was relatively quiet as Wall Street was closed due to Labor Day celebrations. However, it may be a 'calm before the storm' because on Friday (06/09) new official data about U.S. job creation will be released, while next week more clarity about a military operation in Syria is expected.

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