Currency Update: Why is Indonesia's Rupiah Rallying?
The Indonesian rupiah continued its remarkable rally on Tuesday (22/12). The currency had appreciated 0.98 percent to IDR 13,672 per US dollar by 11:10 am local Jakarta time (Bloomberg Dollar Index). The rupiah has recovered from a recent low of IDR 14,123 on Monday 14 December to IDR 13,672 per US dollar, a 3.2 percentage point advance in about one week. There are several matters that explain this remarkable performance.
Firstly, it is assumed that Indonesia's central bank is intervening to prop up the rupiah in order to push the rupiah toward Bank Indonesia's target range of IDR 13,000 - IDR 13,200 per US dollar for 2015. Meanwhile, a rupiah trader stated that Indonesia's state-owned oil firms (the largest domestic US dollar buyers "have pulled out their bids over the last few days", implying that the rupiah has room to strengthen.
Secondly, the government of Indonesia unveiled its eight economic stimulus package on Monday (21/12). In this latest package it allows the private sector to establish oil refineries, provided that the end products are sold to state-owned energy company Pertamina. Moreover, Indonesia will scrap the import tax for aviation spare parts in an effort to support the domestic aviation industry. Lastly, the government will streamline land-acquisition for infrastructure development across the country through a "one-map policy".
Thirdly, oil prices halted its slide while China's authorities are expected to provide more stimulus to support its sluggish economy (which is growing at a 25-year low pace). A stop to sliding oil prices is important to Indonesia as low oil prices trigger low prices of other commodities (Indonesia being a major commodity exporter). Meanwhile, China is the key trading partner of Indonesia and, as such, improving economic conditions in the world's second-largest economy will boost demand for Indonesian exports. China said its monetary policy should be more flexible and its fiscal policy should be more forceful to combat the sluggish economy.
Despite this recent rupiah rally, most - if not all - global financial institutions expect heavy depreciating pressures on the rupiah in 2016 amid more US interest rate hikes.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 1.85 percent to IDR 13,615 per US dollar on Tuesday (22/12).
Indonesian Rupiah versus US Dollar (JISDOR):
| Source: Bank Indonesia