Rupiah Exchange Rate Indonesia: Why Did it Appreciate on Wednesday?

On Thursday the European Central Bank (ECB) will meet to discuss monetary policy. It has been increasingly speculated that the ECB will introduce a quantitative easing program to boost the sluggish economy of the Eurozone. Analysts expect to see a 550 billion euro QE program which will boost global liquidity and is expected to be partly channeled to higher yielding Asian markets.

The US dollar may also have weakened amid profit taking after the currency of the world’s largest economy has appreciated markedly in recent times.

Domestically, there are also several issues that made a positive impact on the performance of the rupiah today (21/01), causing bonds to advance, and the ten-year yield to fall to the lowest level since October 2013.

On Tuesday (20/01), Indonesia’s Finance Ministry sold IDR 17.3 trillion (USD $1.4 billion) worth of conventional bonds at an auction. This result was above an indicative target of IDR 12 trillion and the bonds had lower yields than in the previous bond auction (held on 6 January 2015). The one-year T-bills sold on Tuesday had a weighted average yield of 6.44242 percent, while the weighted average yields for nine-year and 19-year bonds were 7.47718 percent and 7.92764 percent, respectively. Total incoming bids were IDR 54.785 trillion and the highest bid-to-cover ratio was 5.83 for the one-year T-bills.

From the political domain, investors were content to see growing political stability in Southeast Asia’s largest economy as all political parties within Indonesia’s House of Representatives (DPR) agreed to support direct local elections. Last September, the (outgoing) House had passed a controversial bill that was widely criticized by media and analysts. The approval of this bill meant that direct voting in the regions of Indonesia would be scrapped, leaving it to the regional legislatures to elect mayors, district heads and governors. Critics immediately said that this would be a setback for democracy, opening up room for corruption in local elections. After the passing of the law, former President Susilo Bambang Yudhoyono issued a presidential decree to override parliament’s approval. On Tuesday (20/01), Indonesia's parliament agreed to respect direct regional elections.

Apart from enhanced political stability in Indonesia, investors are also pleased to see that President Joko Widodo kept his promise by reforming the country’s generous fuel subsidy program (subsidized fuel prices were raised in November 2014 and largely scrapped by January 2015). These reforms have opened up fiscal space for economic and social development in Widodo’s quest to raise the country’s GDP growth to 7 percent (y/y) by the end of his first term.

However, the rupiah is still expected to continue its depreciating trend in the first half of 2015 due to bullish US dollar momentum and continued pressures caused by Indonesia's wide current account deficit.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.81 percent to IDR 12,557 per US dollar on Wednesday (21/01).

| Source: Bank Indonesia

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