Investors are again in search of safe haven assets on Wednesday (27/09), hence most emerging market currencies, including Indonesia's rupiah exchange rate, are weakening against the US dollar. Based on the Bloomberg Dollar Index, the rupiah had depreciated 0.28 percent to IDR 13,412 per US dollar by 14:45 am local Jakarta time. Yesterday, the rupiah had already weakened 0.37 percent against the greenback.
There are several factors that cause this weak rupiah performance - or - strong US dollar performance:
- The US Federal Reserve is set to shrink its huge balance sheet starting per October 2017, while there are growing expectations that the US central bank will implement another interest rate hike in December. On Tuesday (26/09) Fed Chair Janet Yellen warned that it would be "imprudent" to keep policy on hold until US inflation heads back to 2 percent. She further stated that the Fed "should also be wary of moving too gradually" on rates.
- US President Donald Trump plans to unveil a new tax reform plan on Wednesday. Based on statements from Trump, this tax plan will cut taxes significantly for the middle class. The US corporate income tax target rate would possibly be suggested to fall to a range of 18-23 percent, down from the current rate of 35 percent. The controversial US president further emphasized that tax cuts are needed for the USA to thrive, grow and prosper. Expectations about the tax reform plan may very well prop up the US dollar today even though tax reforms have always been difficult in the USA (since Ronald Reagan).
- Leaders of North Korea and the USA continue to insult (and provoke) each other, while claiming and warning that warfare is not far off. This geopolitical turmoil contributes to a risk-off situation.
- Last week, Indonesia's central bank (Bank Indonesia), again, cut its key interest rate. Bank Indonesia cut its benchmark BI 7-day Reverse Repo Rate by 25 basis points from 4.50 percent to 4.25 percent at the September 2017 policy meeting. Moreover, it seems the central bank of Indonesia is eager to ease monetary policy again, provided there is enough room. A lower benchmark interest rate tends to put pressure on a country's currency.
- The outcome of the recently concluded German elections sparked risk-off sentiments among investors. The German electorate gave German Chancellor Angela Merkel a fourth term. However, she needs to form a new government with a coalition of junior parties. It therefore may take a few months for Germany to have a working government in place. This causes some uncertainties and pressures on the Euro currency.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.27 percent to IDR 13,384 per US dollar on Wednesday (27/09).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia