Stock indices in Southeast Asia plunged on Friday (18/12), led by benchmark indices in Thailand and Indonesia. These Asian markets followed the global correction that occurred after investors weighed in the possible impact of the Federal Reserve's interest rate hike. US and European stocks dropped on Thursday and Friday, while prices of oil and other commodities continued to slide. Indonesia's Jakarta Composite Index fell 1.92 percent to 4,468.65 points.

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After the rally on Thursday (responding positively to the Federal Reserve's announcement to raise its Fed Fund Rate), Indonesian assets are weakening on Friday (18/12) while most other Asian markets are down. Indonesia's benchmark Jakarta Composite Index was down 1.20 percent to 4,501.34 points by 09:45 am local Jakarta time, while the Indonesian rupiah had depreciated 0.22 percent to IDR 14,040 per US dollar (Bloomberg Dollar Index). As such, Indonesian stocks are following the example of US stocks that plunged overnight.

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Bank Indonesia, the central bank of Southeast Asia's largest economy, kept its key interest rate (BI rate) at 7.50 percent at the December policy meeting on Thursday (17/12). Meanwhile, the overnight deposit rate facility (Fasbi) was left unchanged at 5.50 percent and the lending facility at 8.00 percent. It was the tenth consecutive month without changing the country's interest rate environment (in February 2015 the central bank cut the BI rate by 0.25 percent).

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Indonesian stocks and the rupiah responded highly positive to the decision of the US Federal Reserve to raise its key Fed Fund Rate by 25 basis points on Wednesday (16/12). Indonesia's benchmark stock index (Jakarta Composite Index) soared 1.62 percent to 4,555.96 points, while the rupiah appreciated 0.44 percent to IDR 14,009 per US dollar. Not only in Indonesia but also globally stocks thrived on the ending of prolonged uncertainty about the timing of the US interest rate hike.

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The US Federal Reserve finally decided to raise the Fed Fund Rate by 25 basis points at its December policy meeting (15-16 December) on a considerable improvement in US labor market conditions (the US unemployment rate having fallen to 5 percent) and US inflation projected to meet the Fed's 2 percent target over the medium term. After this announcement US stocks soared. Emerging markets were not hit by severe capital outflows after the rate hike. Asian stock indices strengthened sharply on Thursday morning (17/12).

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Stock markets in Asia are experiencing rough weather as investors pull funds out of emerging markets. By 11:25 am local Jakarta time, Indonesia's benchmark Jakarta Composite Index had plunged 1.11 percent to 4,344.69 points, while the rupiah had depreciated 0.54 percent to IDR 14,068 per US dollar (Bloomberg Dollar Index). Investors are seeking safe(r) haven assets as the Federal Reserve is expected to raise its key Fed Fund Rate (for the first time in almost a decade) at its next FOMC meeting (scheduled for 15-16 December).

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On the last trading day of the week, Indonesian stocks plunged 1.63 percent to 4,393.52 points, while the rupiah depreciated 0.22 percent to IDR 13,984 per US dollar (Bloomberg Dollar Index). Most Asian indices were weaker as investors are bracing for - most likely - the first Fed Fund Rate hike in nearly a decade. On 15-16 December the US Federal Reserve will hold a crucial policy meeting. Tighter monetary policy in the USA leads to capital outflows from Indonesia as the country is regarded particularly vulnerable to such a move.

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Asian stock indices - including Indonesia's benchmark Jakarta Composite Index which reopened after a market holiday - were mostly in red territory on Thursday (10/12) as investors are cautious ahead of the looming US interest rate hike, expected to be decided upon at the Federal Reserve's next policy meeting (15-16 December), as well as low oil prices and falling US stocks overnight. Moreover, the central bank of China allowed its yuan to depreciate further (to a near four-month low), hence resulting in the resurgence of some fears of a currency war in Asia.

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The Indonesian rupiah is again flirting with the IDR 13,900 per US dollar level after the central bank announced on Monday (07/12) that Indonesia's foreign exchange reserves fell further in November. Based on the Bloomberg Dollar Index, the rupiah had depreciated by 0.19 percent to IDR 13,887 per US dollar at 15:30 pm local Jakarta time on Tuesday (08/12). Other factors that put pressure on the rupiah are the low oil price (giving rise to a strong US dollar), weak trade data from China, and the looming US interest rate hike.

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The foreign exchange reserves of Indonesia fell slightly in November. According to the latest data from Indonesia's central bank (Bank Indonesia) the reserves stood at USD $100.24 billion at end-November, down from USD $100.7 billion at the end of the preceding month. The reserves fell on foreign exchange receipts, public foreign debt payments and the central bank's efforts to stabilize the rupiah exchange rate.

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Indonesian assets weakened on Friday (06/11) on expectation that US non-farm payrolls and US employment data would improve, suggesting that a Fed Fund Rate hike may occur in December 2015. Such expectations were correct. After Indonesian and other Asian markets had closed on Friday, the US Labor Department announced that October payrolls rose 271,000 (the largest increase this year), while the US unemployment rate touched a seven-year low at 5 percent. Furthermore, the average hourly earnings over the past 12 months climbed by the most since 2009.

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As Indonesia's inflation rate has eased to 6.25 percent (y/y) in October 2015 from 6.83 percent (y/y) in the previous month, and given that Indonesian inflation will ease more markedly in the last two months of 2015 as the impact of the subsidized fuel price hike in November 2014 will vanish, the central bank of Indonesia (Bank Indonesia) seems to have more scope to cut its current relatively high benchmark interest rate, hence giving rise to accelerated economic activity.

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In the latest edition of its flagship publication, the World Economic Outlook (WEO), the International Monetary Fund (IMF) says it is concerned that sluggish global economic growth will persist in the foreseeable future particularly on the back of slowing growth in emerging markets (which account for the lion's share of global growth). The IMF's forecast for global growth in 2015 and 2016 was both cut by 0.2 percentage point to 3.1 percent (y/y) and 3.6 percent (y/y), respectively, from the July WEO Update. In 2014, the world economy grew 3.4 percent (y/y).

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After the release of US non-farm payrolls on Friday (02/10) markets are starting to doubt whether the Federal Reserve has room to raise its key Fed Fund Rate at all in 2015. In September a total of 142,000 jobs were added to the US economy, well below the market consensus of 201,000. Moreover, August non-farm payrolls were revised down to 136,000 (from 173,000 initially). It was the first time since mid-2013 that US jobs grew at such a slow pace in two consecutive months. So far in 2015 US non-farm payrolls grew at an average of 198,000 per month, significantly down from the average growth pace of 260,000 per month last year.

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After a real roller coaster ride, Indonesia’s benchmark stock index (Jakarta Composite Index) climbed 0.35 percent to 4,446.20 points at the end of the trading week. The majority of key stock indices across the globe tended to strengthen on Friday after a week characterized by severe volatility amid concern about the economic situation in China.

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During Bank Indonesia’s Board of Governors it was decided on 18th August 2015 to hold the BI Rate at 7.50 percent, while maintaining the Deposit Facility rate at 5.50 percent and the Lending Facility rate at 8.00 percent. The decision is consonant with efforts to control inflation within the target corridor of 4±1 percent in 2015 and 2016. In the short term, Bank Indonesia (BI) is focused on efforts to stabilize the rupiah amid uncertainty in the global economy, by optimizing monetary operations in the rupiah and the foreign exchange market.

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For most of this year, the financial media has held a generally positive tone. There have been some exceptions in cases like the Eurozone which is still mired in a deeply divided sovereign debt crisis. But for most of the world, 2015 has been a positive period in terms of general growth in their broad trends. So it might be easy for macro investors to assume that most markets are currently establishing themselves in the bullish direction.

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For most of this year, the Indonesian rupiah has met selling pressure against the US Dollar. Year-to-date price activity in the USD/IDR shows a rise from below IDR 12,250 to new highs above IDR 13,330 per US dollar. For Indonesian export companies, this is great news as it means that their products will be cheaper for foreign consumers to buy. For the domestic economy, this creates a different set of implications as it also makes it less likely that foreign investors will be looking to buy into Indonesian assets.

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Since late 2011 Indonesia has been plagued by a structural current account deficit (CAD) that has worried both policymakers and (foreign) investors. Despite Indonesian authorities having implemented policy reforms and economic adjustments in recent years, the country’s CAD remains little-changed in 2015. The World Bank and Bank Indonesia both expect the CAD to persist at slightly below 3 percent of the nation’s gross domestic product (GDP) in 2015, alarmingly close to the boundary that separates a sustainable from an unsustainable deficit.

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When we look at the long-term activity in the Indonesian rupiah, we have seen a surprising level of strength when viewing the activity seen in recent months. This has been surprising for a few different reasons, as this is not something that can be said for markets in emerging Asia as a whole. This essentially suggests that economic activity in the region has been somewhat disjointed and that trends visible in one country cannot necessarily be expected in another. But when we look at chart activity in the rupiah itself, we can see that the broader trends have started to change over the last two months.

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