The Indonesian rupiah is flirting with the IDR 13,000 per US dollar level on Monday (07/03) supported by improving risk appetite of investors. By 13:40 pm local Jakarta time, the currency of Indonesia had appreciated 0.64 percent to IDR 13,047 per US dollar (Bloomberg Dollar Index). The rupiah is now on a 13-day 'winning streak', its longest rally in six years, and is the second-best performing emerging market currency after Brazil's real so far this year. What is behind this good performance, and is it sustainable?
Risk sentiment has been improving due to climbing crude oil prices (gradually climbing toward the USD $40 per barrel level). Higher oil prices can be regarded as an indicator that global economic growth improves (although the oil rally is more influenced by expectation of a supply cut rather than higher demand). Still, higher oil prices should manage to boost prices of other commodities such as coal and crude palm oil (CPO). Indonesia is one of the world's top exporters of coal and CPO and will therefore benefit when a rebound in commodity prices occurs.
Another external factor that impacts positively on the value of Indonesia's rupiah is high expectation of a delay of another US interest rate hike. Most analysts see a new US interest rate hike happening in the second half of 2016 as recent US macroeconomic data have been weak. However, last Friday it was announced that the USA added a total of 242,000 jobs (more-than-expected) in February 2016, while the unemployment rate remained at 4.9 percent. Still, due to concern about US economic growth there could be delay of another US interest rate hike until the second half of the year. Another US interest rate hike would boost demand for the US dollar.
Lastly, Indonesia's high-yielding assets are attractive now various central banks have adopted negative interest rates (Japan, the Eurozone, Sweden, Denmark and Switzerland). The benchmark interest rate (BI rate) of Bank Indonesia is still at 7.00 percent. However, the country's central bank seems to have room for more interest rate cuts this year. In the first two months of 2016 Bank Indonesia cut its BI rate twice by 0.25 percent from 7.50 percent to 7.00 percent.
Internally, investors have regained confidence in the Indonesian economy due to accelerated economic growth in Q4-2015 (5.04 percent y/y). This upbeat growth rate comes on the back of enhanced government spending realization and thus shows that the Indonesian government is serious about boosting GDP growth. The government has also opened investment opportunities in Indonesia (to foreign direct investment) in one of its latest economic policy packages.
Meanwhile, Indonesia's inflation rate and current account deficit have been easing over the past two quarters. The recent capital inflows into Indonesia will also support the country's foreign exchange (forex) reserves. In ten of the past 11 months, these reserves shrunk (partly due to central bank operations to defend the rupiah). Rebounding forex reserves also improve confidence in Indonesia's fundamentals. In the first two months of 2016 a total of IDR 35 trillion (approx. USD $2.6 billion) of foreign funds have flown into Indonesia's rupiah-denominated sovereign bonds and stocks.
Indonesia's Chief Economics Minister Darmin Nasution stated late last week that the rupiah should not strengthen above its fundamental value. This statement can be regarded an indication that the government considers the recent strong rupiah performance excessive. An excessively strong rupiah can do further damage to Indonesia's export performance (Indonesia's export slump has been ongoing for 16 months). If the government continues to give signals that the rupiah is overvalued then it should curtail confidence in the currency.
Three central bank meetings can influence the performance of the rupiah. On 10 March 2016, the European Central Bank (ECB) will hold its next policy meeting. If the ECB decides to add more stimulus it will boost funds in the global financial system and give rise to higher demand for higher-yielding assets, including those in Indonesia. On 15-16 March 2016, the US Federal Reserve will conduct its next policy meeting. Although few believe the Fed to announce an interest rate at this meeting, there may occur some pressure on the rupiah ahead of this meeting due to the latest upbeat US labour data. However, if it will not raise its key Fed Fund Rate then there is room for further rupiah strengthening. Lastly, on 16-17 March Bank Indonesia will hold its monthly policy meeting. There may be some room for another small interest rate cut (which would put temporary pressure on the rupiah).
Although still two months away, Indonesia's Q1-2016 GDP growth data (to be released at the start of May) is one of the crucial factors that will determine the course of the rupiah this year. If Indonesia's GDP growth indeed continues to accelerate after the warmly-welcomed 5.04 percent (y/y) growth pace in Q4-2015, then it should encourage massive inflows. However, if upcoming GDP data fails to show accelerated growth then there is the risk of heavy outflows.
Due to debt payments and dividend payouts there is a (seasonal) jump in US dollar demand in Indonesia in the months May and June. This always gives (short-term) depreciating pressures on the value of the rupiah.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.99 percent to IDR 13,029 per US dollar on Monday (07/03).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia