Analysts expect to see a period of high volatility in the next couple of months as the yuan is finding its equilibrium level. In this period there could emerge capital outflows while accusations that China has begun a currency or trade war have already been expressed. Meanwhile, a sharply weakening yuan would also burden already indebted Chinese companies to pay off US dollar-denominated debt.

The devaluation of the yuan had significant impact on other emerging Asian currencies over the past two days. Yesterday (12/08), Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 1.60 percent to IDR 13,758 per US dollar (despite central bank intervention). Today, it slightly recovered as the JISDOR appreciated 0.08 percent to IDR 13,747 per US dollar.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

However, based on the Bloomberg Dollar Index, the rupiah experience a sharper rebound. By 11:05 am local Jakarta time, the rupiah had appreciated 0.53 percent to IDR 13,728 per US dollar based on this index.

Bank Indonesia Governor Agus Martowardojo said the central bank continues to monitor the market and intervenes when necessary in order to guard the rupiah against high volatility. According to Martowardojo the rupiah is currently undervalued.

Meanwhile, Indonesian stocks also rebounded on Thursday. Indonesia’s benchmark Jakarta Composite Index had climbed 1.88 percent by 11:30 am local Jakarta time, after yesterday’s 3.11 percent plunge. Besides a technical rebound, Indonesian assets may also be supported by Indonesian President Joko Widodo’s decision to reshuffle his cabinet. On Wednesday (12/08) Widodo replaced five ministers and reassigned one to a different position.

Markets seem content with the decision to appoint Darmin Nasution, a senior Finance Ministry technocrat and former Bank Indonesia Governor (hence having ample experience regarding monetary and fiscal policies), as the country’s Chief Economics Minister (replacing Sofyan Djalil who was moved to the position of National Development Planning Minister).