Update Indonesian Rupiah & Stocks: Why they Strengthened Today

In the past four days global oil prices rallied touching one-month highs on news that 94 US oil rigs and 11 Canadian oil rigs have been taken offline over the past week, suggesting that US output will decline. Higher oil prices have a positive impact on financial and stock markets (particularly by lifting energy stocks) as it reduces concerns about further slowing global economic growth and higher oil prices are expected to boost prices of other commodities. Since mid-June 2014, global oil prices have lost about 50 percent of their value.

Concern about a deepening crisis in Europe eased after Greek Prime Minister Alexis Tsipras sought to reassure international partners that the Greek administration has no intention to create divisions in the Eurozone and confirmed that he is open to listen to alternative proposals for the country’s debt settlement. This statement was positively received by investors as it reduces concern about a Greek default.

Other positive news involved a successful bond sale at an auction on Tuesday (03/02). These bond inflows lifted Indonesian debt prices. The Indonesian Finance Ministry sold IDR 16 trillion (roughly USD $1.26 billion) of conventional bonds on Tuesday (03/02), higher than the indicative target of IDR 12 trillion. Total incoming bids totalled IDR 40.2 trillion. The highest bid-to-cover ratio was 6.82 for the three-month T-bills.

Meanwhile, the US dollar weakened against many currencies as the result of weak US factory orders. The US Commerce Department announced on Tuesday (03/02) that new orders for manufactured goods fell 3.4 percent (falling for a fifth straight month in December) as demand across a broad sector of industries declined.

Combined, these news stories resulted in growing risk appetite. Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.27 percent to IDR 12,609 per US dollar on Wednesday (04/02).

Indonesian Rupiah vs US Dollar:

| Source: Bank Indonesia

Earlier in the week, Statistics Indonesia had released several macroeconomic data which were positively received. These data involved easing inflation (from 8.36 percent year-on-year in December 2014 to 6.96 percent year-on-year in January 2015) and a USD $186.8 million trade surplus in December 2014. This monthly surplus helped to curb the country’s general trade deficit. Over the whole year of 2014, Southeast Asia’s largest economy posted a USD $1.88 billion trade deficit, significantly better than the USD $4.08 billion deficit it recorded one year earlier.

On Thursday (05/02) Statistics Indonesia will release Indonesia’s fourth quarter GDP growth result. It is expected to have slowed to 4.9 percent (y/y) in Q4-2014. Since 2011 the economy of Indonesia has had to cope with a slowing economy amid the weak global economy (resulting in weak demand for Indonesian commodities) and the internal rebalancing of the economy (fuel subsidy cuts and the higher interest rate environment). On a positive note, the economy of Indonesia is expected to accelerate from 2015 onward due to structural reforms implemented by the administration of President Joko Widodo.

The benchmark Jakarta Composite Index climbed 0.45 percent although its performance was curbed by the news about capital injections (through rights issues with prices far below market prices) in state-controlled construction companies. For example, shares of Adhi Karya plunged 10.3 percent to IDR 3,410 after it was known that it would conduct a rights issue at IDR 2,525 per share. Other construction companies, particularly state-controlled ones, fell accordingly.

Jakarta Composite Index - IHSG:

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