The dramatic performance of Asian currencies and stocks on Monday had already been predicted as indices in the USA and Europe tumbled on Friday due to concerns about the global economy (with oil prices falling again), uncertainty about the timing of higher US interest rates, and the recent devaluation of China’s yuan (renminbi). China’s move to allow a lower yuan (against the US dollar), triggering a currency war in Asia, is aimed at improving the country’s export performance hence boosting economic growth. However, the move also triggered concern that the world’s second-largest economy is slowing faster than expected. Being a key trading partner, a slowing Chinese economy has a significant impact on regional countries, including Indonesia.

Negative sentiments on Chinese markets heightened as traders and investors are disappointed over the lack of liquidity that is injected into China’s banking system. The central bank of China was reported to flood the country’s banking system with liquidity in an effort to boost lending. However, there has been no official action over the weekend.

On a global scale investors have been selling assets from stocks to emerging-market currencies and high-yield bonds, while seeking safe haven assets such as US government bonds and gold.

Indonesian assets entered bearish territory. Besides external factors (sluggish global economic growth, looming higher US interest rates, and turmoil in China) there has emerged concern about internal factors, particularly the capability of the Joko Widodo-led government to realize its ambitious development targets and boost economic growth (that has slowed to a six-year low). As such, there was not a real positive effect when President Widodo reshuffled its cabinet or when he presented the country’s 2016 State Budget draft. Investors now prefer to wait and see for government action before investing in Indonesian assets.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.74 percent to IDR 13,998 per US dollar on Monday (24/08). Contrary to Vietnam, which devalued its dong after China let its yuan weaken, Indonesia does not need to join the currency war as the rupiah (not pegged to the US dollar) depreciates without effort. Instead, Bank Indonesia is in the market to intervene and support the ailing rupiah.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia