Rupiah, stocks still under pressure

Dadan Wijaksana, The Jakarta Post, Jakarta

The rupiah, having depreciated another 2 percent against the U.S. dollar last week, is likely to remain under pressure in the next couple of weeks as prevailing uncertainties surrounding the U.S. interest rate hike and the domestic political scene continue.

"The combination of those factors causes negative sentiment in the market. The expectations are unclear -- which creates uncertainty," Citigroup economist Anton Gunawan told The Jakarta Post over the weekend.

The uncertainty would remain until after the U.S. eventually decided whether it would actually raise its benchmark interest rates, he added.

"I think at least until the middle of June, the rupiah will remain volatile, with a tendency to weaken further," he said, adding the local unit had a strong possibility of slumping beyond 9,500 per dollar.

The ailing currency has been hit hard by recent strength of the dollar, more than any other currencies in the region.

It ended last week at 9,465, a 1.9 percent slide from 9,290 the week before, capping a hefty 12 percent slide since Jan. 2, the first trading of the year -- making it East Asia's worst currency performer.

The U.S. Federal Reserve will likely raise its key short-term interest rate, currently at a 46-year low of 1 percent.

The rate has been kept low in a bid to counter weak demand and declining inflation. But, now that the U.S. economy is moving at a speedier pace upward, analysts are betting on the first rate hike in more than four years.

"However, since the (possible) hike will only be decided by the end of the month, uncertainty will remain along the way," Anton added, referring the U.S. Federal Reserve's next meeting on June 29-30.

Such an increase would make investment in dollar-denominated assets more attractive for investors, further weighing on the rupiah's performance.

Another unfavorable factor for the local unit should come from the ongoing process of presidential elections.

With the campaigns entering the second week, frictions among candidates and their supporters are expected to heighten, causing jitters in the markets.

"Although the campaigning has so far been relatively peaceful, the market can only feel a genuine comfort when it is all over," said a currency dealer at a bank.

Both analysts doubted that the action plan announced last week by Bank Indonesia would be fully effective in curbing speculation against the local unit. The central bank announced its plans to absorb funds from banks to help prevent the rupiah from further declining, including raising the minimum reserve requirements of banks and broadening investment alternatives for banks.

As for the stock market, the estimated weakening of the rupiah is expected to further depress the index as investors may switch from the stock market to the currency market, a dealer said.

The Jakarta Composite Index closed last week at 697.94 points, down by 4.9 percent from the previous week. "The rupiah's fall will begin hurting the index, although bargain-hunters could eventually help limit the decline," the dealer said.

A drop in the rupiah's value will make large companies pay higher for their imported materials and debt repayments -- prompting stock investors to sell off their shares as they become less attractive.

Last week, the daily volume averaged 858.8 million shares valued at Rp 775.1 billion (US$82 million), compared to 950.9 million shares in the previous week.