Officially, China devalued its currency to make it more responsive to market forces but it is assumed that the move aims to boost its export performance (which has been slowing since 2011 and which drags down the country’s economic expansion). On Tuesday (11/08), the People’s Bank of China had allowed its daily reference rate to weaken 1.9 percent against the US dollar, the country’s largest devaluation since July 2005. Today, the yuan depreciated another 1.6 percent against the greenback. Although China may be only playing “catch up” (other emerging market currencies were allowed to depreciate gradually yet sharply amid tighter US monetary policy) as a result of the devaluation the US dollar appreciates markedly while regional emerging market currencies (including the rupiah) depreciate sharply (and which helps to keep their exports competitive with China’s exports).

The International Monetary Fund (IMF) stated that China’s decision to devalue its currency (to make it more responsive to market forces) is a welcome step and that the country should target to achieve an effectively floating exchange rate within the next two to three years.

The central bank of Indonesia (Bank Indonesia) responded to today’s sharp rupiah depreciation by saying that this situation is not caused by domestic factors but primarily because of external factors (China’s devaluation of the yuan) and therefore not only the rupiah is plunging but most currencies (except for the US dollar) are depreciating.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 1.60 percent to IDR 13,758 per US dollar on Wednesday (12/08).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

Moreover, Indonesia is also plagued political uncertainty which puts additional pressure on Indonesian assets. Due to the continuation of Indonesia’s economic slowdown, it is expected that President Joko Widodo will reshuffle his cabinet. In Indonesian media the names of Sofyan Djalil (Chief Economic Minister), Rahmat Gobel (Trade Minister), and Yuddy Chrisnandi (Administrative and Bureaucratic Reform Minister) are mentioned as people set to be replaced.