Despite Rate Hike, Indonesian Rupiah Weakens Further Against US Dollar
Despite the interest rate hike, pressures on the Indonesian assets remained high on Friday (18/05) as the US dollar and US bond yields hold firm near their recent highs. By the end of the trading day the Indonesian rupiah had depreciated 0.70 percent to IDR 14,156 per US dollar (Bloomberg Dollar Index), touching lows we have not seen since late 2015.
Today's US dollar strength is attributed to benchmark 10-year US treasury yields hovering near their highest level in seven years. Meanwhile, the latest comments of US President Donald Trump on trade negotiations with China cause some concern. Trump said he doubts the ongoing trade talks with China in Washington will turn out to his satisfaction because "China has become very spoiled". Trump also said "the European Union (EU) and other countries have become very spoiled because they always got 100 percent of whatever they wanted from the USA."
Such statements cause renewed concerns about the breakout of a global trade war. But on the other hand, the EU vowed that it is ready to negotiate opening its markets wider to US imports - including car shipments - in a bid to avert a potential trade war.
At the May 2018 policy meeting (concluded on Thursday) Indonesia's central bank (Bank Indonesia) decided to raise its benchmark interest rate by 25 basis points to 4.50 percent in an effort to reduce heavy pressures on the rupiah.
Generally, recent rupiah weakness is caused by the following external pressures:
• Rising US treasury yields
• Looming further monetary tightening by the US Federal Reserve
• Rising crude oil prices
• Concerns about the breakout of a global trade war (led by the USA and China)
• Concerns about stability on the Korean peninsula
• Concerns about the US withdrawal from the Iran nuclear deal
Meanwhile, domestic issues that impact negatively on investor appetite are:
• Indonesia's wider Q1-2018 current account deficit
• An unexpectedly large monthly trade deficit in April 2018
• A series of terrorist attacks over the past couple of days
Meanwhile, Indonesia's benchmark Jakarta Composite Index is moving flat so far on Friday (18/05), shifting from green to red and back. Apparently, investors are confused whether to invest now (and take advantage of the recent decline of Indonesian stocks) or refrain from investing as stocks may decline further in the next couple of trading days.
Update: when trading ended on Friday (18/05) the Jakarta Composite Index was down 0.56 percent to 5,783.31 points.
