Rupiah expected to rebound this week

The Jakarta Post, Jakarta

Caution will likely be the watchword this week following last week's fall of the rupiah, but dealers are looking for the local unit to rebound.

The rupiah fell to a three-month low of Rp 8,730 per US dollar in the middle of last week as investors took profit by selling rupiah-denominated assets, but intervention by Bank Indonesia and the close monitoring of banks engaged in heavy selling of the rupiah helped strengthen the unit to 8,520 by the close of trading last week.

However, this was still lower than 8,320 per dollar the rupiah closed at the week before.

"Judging from Bank Indonesia's quick response, coupled with expectations of profit-taking, confidence in the market is running high that the rupiah will claw its way back up," a dealer at a European-based bank told The Jakarta Post over the weekend.

Reports said that the central bank dispatched inspectors to a number of banks involved in aggressive selling of the rupiah, to ensure their dollar buying activities were based on genuine underlying transactions, and were not for speculative purposes.

Rising confidence in the U.S. economy triggered the dollar's rise against currencies around the world last week, including the rupiah, whose rapid appreciation had made it a star performer in the region.

Foreign investors actively sold their rupiah assets, mostly bonds, to be followed by domestic investors who sold rupiah to cut losses, adding to the pressure on the local currency.

In addition to external factors, domestic issues also contributed to the rupiah's fall. These included the declining interest margin between Indonesia and other countries, as well as plans to start imposing taxes on previously tax-free mutual funds.

Mutual funds have been exempt from income tax to help boost investment in the country's capital market.

Bank Indonesia stepped in during the last two days of the week, selling its huge dollar reserves to support the local unit.

"If the central bank continues to show similar signs (of intervention), we're going to see a rebound. But still in a narrow range of about Rp 8,500 to 8,400 per dollar," the dealer said.

"With Bank Indonesia around, speculative trading and panic selling will be limited," he added.

Meanwhile in the stock market, expectations that the rupiah will recover should help push the Jakarta stock index up, an analyst said.

"There is confidence that Bank Indonesia will maintain its open-eye policy on the rupiah. If this happens, then the index will bounce back as well," a stock analyst at Kim Eng Securities told the Post.

The Jakarta Composite Index fell sharply last week, dragged down by the local unit's fall, but rebounded slightly on Friday to close at 510.08, or 2.9 percent lower than the previous week's close.

Daily value averaged Rp 477 billion compared to Rp 630.42 billion the week before.

"If the rupiah can stay in a range of 8,400 to 8,500 per dollar then the sentiment for the stock market will be positive," the analyst said.