The Indonesian rupiah exchange rate depreciated sharply on Monday (29/09) due to the market’s reaction against parliament’s passing of a bill that ends direct elections in the regions. On Friday (26/09), parliament agreed that mayors, district heads and governors will be elected by local legislatures instead of the people. Critics say this bill is a major setback for democracy and makes the system more vulnerable to corruption. Last Friday, investors had already pulled USD $119 million from Indonesian shares.

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Despite some concern about inflation, the US Federal Reserve stated that it will keep interest rates close to zero. The central bank announced this after the two-day policy meeting (Federal Open Market Committee, FOMC). Ahead of the meeting, market participants had increasingly speculated about the chance of sooner-than-expected US interest rate hikes as US economic data has generally been positive (including 4.2 percent GDP growth in the second quarter and weekly jobless claims that declined to near record lows).

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Ahead of the Federal Reserve’s Federal Open Market Committee (FOMC) meeting, the Indonesian rupiah exchange rate depreciated 1.26 percent to IDR 11,971 per US dollar based on the Bloomberg Dollar Index on Monday (15/09). Indonesia’s currency depreciated sharply ahead of the FOMC’s two-day meeting as investors are awaiting for the results on Thursday. As August US retail sales rose at the fastest pace in four months, a winding down of the US bond-buying program and looming US interest rates have resulted in a strong US dollar.

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There are mixed opinions about the interest rate policy of the central bank of Indonesia (Bank Indonesia). Tomorrow (11/09), at the Board of Governor’s Meeting, the central bank will decide whether or not to change the country’s interest rates. Indonesia’s benchmark interest rate (BI rate) has been held at 7.50 percent for ten consecutive months. This relatively high figure managed to ease high inflation (which emerged after prices of subsidized fuel prices were raised in June 2013). However, it also further slowed economic growth.

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Although the Indonesia stock exchange as well as most businesses are still closed on Friday (01/08) amid Idul Fitri celebrations, trading in the Indonesian rupiah resumed after a four-day holiday. Impacted by developments in the USA, the Indonesian rupiah exchange rate had depreciated 1.82 percent to IDR 11,791 per US dollar by 12:25 pm local Jakarta time (based on Bloomberg Index). Asian currencies are heading for the largest weekly decline since June 2014 after US economic data indicate improved economic recovery of the USA.

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US gross domestic product (GDP) growth in the second quarter of 2014 expanded 4 percent year-on-year (yoy), thus having nearly doubled from the GDP growth pace in the first quarter (2.1 percent yoy) when the USA was hit by severe winter weather. The US economic growth pace in Q2-2014 also exceeded analysts' forecasts who expected US GDP growth to range between 2 and 2.5 percent. Strong growth was caused by improved US consumer spending (expanding 2.5 percent and contributing over two-thirds to total economic activity in the USA).

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While some investors hope that the European Central Bank will enhance monetary easing by pumping more funds in the economy, the Federal Reserve is expected to continue monetary tightening. On 29-30 July, the Federal Open Market Committee (FOMC) meets and probably reduce the bond-buying program (quantitative easing) by another chunk of USD $10 billion to USD $25 billion in August. Since the start of 2014 when the Fed bought USD $85 billion worth of bonds per month, the program has been wound down amid an improving US economy.

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Five emerging markets, India, Brazil, Turkey, South Africa and Indonesia, have become known to the world in 2013 as the ‘Fragile Five’, a term coined by analysts at Morgan Stanley. This term refers to those five emerging economies that were considered most vulnerable to the winding down of the US Federal Reserve’s quantitative easing program (bond-buying program) as capital inflows dried up, or, in fact reversed. The five countries were assessed as risky due to their twin fiscal and current-account deficits, slowing economic growth and high inflation.

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The US dollar continues to depreciate against emerging currencies after the minutes of the Federal Reserve’s latest FOMC meeting, released Wednesday (09/07), suggest that the US central bank will maintain historic low interest rates (0.0 - 0.25 percent) into 2015. The Fed informed that US interest rates hikes will only occur ”a considerable time” after the US asset-buying program (quantitative easing) has ended. Based on the latest minutes, this program is expected to end in October 2014.

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Head of the International Monetary Fund (IMF) Christine Lagarde stated on Sunday (06/07) that the institution expects improved global economic growth in the second half of 2014 as well as in 2015 supported by the assumption that China, the world’s second-largest economy, will expand between 7.0 and 7.5 percent in 2014, thus not showing a sharp slowdown. Later this month, the IMF will release its new global economic outlook. Lagarde said that forecasts will be slightly different from forecasts made in the April edition.

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Governor of the central bank of Indonesia (Bank Indonesia), Agus Martowardojo, commented on Indonesia’s troubled current account balance on Tuesday (12/08). Martowardojo said that he expects the balance to improve in 2014. Last year, the current account deficit of Southeast Asia’s largest economy reached 3.3 percent of gross domestic product (GDP); a level which is generally regarded as unsustainable. This year, the deficit may ease to 3 percent of GDP. For investors the current account balance is an important matter. Why?

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Despite China’s positive economic growth of 7.5 percent in the second quarter of 2014, most Asian stock indices were down. Only Hong Kong's Hang Seng Index (HSI) managed to show a slight gain as large cap stocks were sought after. The HSI impacted positively on the benchmark stock index of Indonesia (known as the Jakarta Composite Index or IHSG) on Wednesday (16/07) which climbed 0.85 percent to 5,113.93 points on Wednesday (16/07). Foreign investors recorded net buying.

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The Indonesian rupiah exchange rate appreciated 0.33 percent to IDR 11,698 per US dollar on Wednesday (16/07) according to the Bloomberg Dollar Index. Although at the start of the trading day the rupiah weakened due to commentary of Federal Reserve Head Janet Yellen who said that US interest rates may increase sooner than expected provided that the US job market improves faster than anticipated, at the end of the trading day Indonesia's currency strengthened on improved economic growth in China, the world’s second-largest economy.

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Most Asian stock indices were up on Tuesday (15/07) influenced by rising indices on Wall Street and in Europe on the previous day. Also for investors on Indonesia’s benchmark stock index (Jakarta Composite Index) this meant an opportunity to engage in stock trading even though the Indonesian rupiah exchange rate depreciated considerably and political uncertainties remain (as the winner of the Indonesian presidential election remains a question mark). In fact, investors were confused to see the Merah Putih coalition.

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After a disastrous year in 2013, characterized by capital outflows from emerging economies, global investors’ confidence in emerging markets seems restored in 2014. More and more money has been flowing to Latin America and Asia, causing rising regional stock indices and lower bonds yields. For example, the stock index of India has reached a near-record level. This is in sharp contrast with developments last year when emerging stock indices, exchange rates and (most) interest rates increased.

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On Tuesday (08/07), both the Indonesian rupiah exchange rate and stocks continued where they left off yesterday. Supported by optimistic market participants speculating on a Joko Widodo victory in Wednesday’s presidential election, the rupiah appreciated 0.74 percent to IDR 11,626 per US dollar based on the Bloomberg Dollar Index, while the country’s benchmark stock index (Jakarta Composite Index) rose 0.72 percent to 5,024.71 points, surpassing the psychological level at 5,000 and approaching its record high level at 5,215 (21 March 2013).

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After the Indonesian rupiah exchange rate temporarily surpassed the psychological boundary of IDR 12,000 per US dollar on Wednesday (18/06), concerns about the fundamentals of the currency emerged. The currency has been under pressure recently due to external factors (monetary policy of the Federal Reserve and geopolitical tensions in Iraq) and domestic factors (large private debt, significant US dollar demand, the wide trade deficit and political uncertainty ahead of the presidential election).

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The Indonesian rupiah exchange rate depreciated 0.62 percent to IDR 11,893 per US dollar on Tuesday (17/06), a four-month low. The main reason behind this poor performance is increased concern about the impact of violence in northern Iraq - namely higher global oil prices - on Indonesia’s trade and budget deficits as Indonesia subsidises a significant amount of domestic fuels). As oil and gas imports accounted for about 23 percent of total imports of Indonesia in April 2014.

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The Indonesian rupiah exchange rate continued its recent depreciating trend on Wednesday (28/05). According to the Bloomberg Dollar Index, the currency had depreciated 0.46 percent to IDR 11,633 against the US dollar at the end of the trading day. The rupiah's performance is in line with the general trend in Asia where most currencies lost ground to the greenback on today's trading day. As various US economic data indicate a continued recovery of the US economy, the market expects more US monetary tightening.

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The central bank of Indonesia (Bank Indonesia) decided at today’s Bank Indonesia Board of Governors’ Meeting, convened on 8 May 2014, to maintain the country's benchmark interest rate (BI rate) at 7.50 percent, with the Lending Facility rate and Deposit Facility rate held at 7.50 percent and 5.75 percent respectively. This policy is consistent with efforts to steer the rate of inflation towards its target corridor of 4.5±1 percent in 2014 and 4.0±1 percent in 2015, as well as to reduce the current account deficit to a more sustainable level.

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