Indonesia's Rupiah Currency Expected to Rebound Soon

Late last week the central bank of Indonesia (Bank Indonesia) announced that it had taken measures to stabilize the rupiah after the currency touched a 20-month low amid big global pressures. Commonly, the central bank sells foreign exchange in order to defend the rupiah.

The recently sliding rupiah is, however, a normal performance, and one that is in line with the performance of other emerging market currencies. After US economic data showed a strengthening US economy (implying rising expectations of a March 2018 Fed Funds Rate hike), while long-term US bond yields were rapidly rising, there emerged a flight to safety (including a shift from stocks to bonds).

But Indonesia is not showing a structural weakness now and therefore rupiah weakness should be limited. The country's current account deficit is under control (at 1.7 percent of GDP in full-year 2017), inflation is low for Indonesian standards (at 3.25 percent y/y in January 2018), the rupiah remains relatively stable (compared to the heavy movements during the 2013-2016 period), while economic growth is expected to accelerate from 5.07 percent (y/y) in 2017 to 5.3 percent (y/y) in 2018. Therefore, the Indonesian rupiah is expected to rebound this month after the latest correction ceases.

Meanwhile, US President Donald Trump signed a major budget plan into law late last week, effectively ending the second government shutdown only hours after it started. This will also clear some uncertainties and therefore boost risk appetite.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) actually appreciated 0.25 percent to IDR 13,609 per US dollar on Monday (12/02).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

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