Hopes high for peaceful election
Dadan Wijaksana, Jakarta
The rupiah, which climbed by 2.8 percent last week, is expected to remain strong in this week's four days of trading, particularly if the Presidential election on Monday turns out as peaceful as the campaigning went.
An uneventful election day would add to the already bullish market sentiment stemming from the limited impact of the recent hike in U.S. interest rate, said currency analyst Panji Irawan.
He added that Bank Indonesia's earlier measures to absorb excess liquidity in the banking sector had so far been effective in curbing speculation against the local unit.
"With the Fed (U.S. Federal Reserve) raising its interest rate by only 25 basis points, coupled with BI's recent moves, it's more expensive for banks to hold the dollar, so the market is now in a rush to sell dollars and buy the rupiah.
"And with no significant problems so far during the elections, it serves as evidence that earlier fears of disturbances were baseless -- something that can boost the sentiment in an even more positive way," Panji of Bank Mandiri, told The Jakarta Post.
Last week, the rupiah closed at 9,150 per U.S. dollar, or up by 2.8 percent from the previous week, supported by the lower- than-expected rise in the U.S. interest rates of 0.25 percentage points. There is also growing confidence that the presidential election process will continue to remain orderly.
An increase of at least 0.50 percentage points had been predicted before.
The central bank also has played its part. Its policy to increase minimum reserve requirements for banks to between 6 and 8 percent, effective since July 1, has reduced excess liquidity in the banking sector, which, in turn, has limited banks' ability to speculate on currency.
The local currency's reemergence last week was in stark contrast to previous weeks, which saw the rupiah hurt by expectations of an aggressive rate hike in the U.S. and political concerns at home ahead of the election.
Should the voting day go smoothly as was expected, Panji said, the rupiah had a good chance of strengthening further to test the level of 9,000.
A dealer at a foreign bank shared Panji's optimism.
"It has been proven that the fears on the Fed and elections were unfounded, most people should have realized that by now.
"So, unless we see something wild on Monday, I think the rupiah will strengthen and breach the 9,000 level this week," the dealer told the post.
In the stock market, the bullish sentiment would also prevail, a dealer said.
The Jakarta Composite Index had a good chance of continuing its rally, having gained more than 3 percent last week, also on expectations of peaceful elections.
The index ended the week at 745.03 points, advancing by 3.4 percent from the week earlier on average daily volume of 1.26 billion shares worth Rp 636.32 billion (US$67.8 million).
"With the lower-than-expected rate hike in the U.S., many investors are shifting their investment from dollar-denominated assets back to the stock market," she said.
The local stock market will be closed on Monday due to election day.