At The End Of The Week, The Rupiah Exchange Rate Strengthened Sharply Along With Expectations of A Easing of the Fed's Interest Rate Increase

The cashier calculates the rupiah currency at foreign currency exchange outlets in Kwitang, Senen, Central Jakarta. (Between/Indrianto Eko Suwarso/wsj)

JAKARTA - The rupiah exchange rate traded between banks in Jakarta on Friday morning strengthened sharply in line with market expectations for the US central bank's (Fed) interest rate hike to be eased, following the release of United States (US) inflation data.

The rupiah this morning strengthened 119 points or 0.77 percent to a position of IDR 15,220 per US dollar compared to the position at the previous close of trading of IDR 15,339 per US dollar.

"The rupiah has managed to continue strengthening driven by reports that US inflation fell to a level of 6.5 percent. This has strengthened the Fed's interest rate easing sentiment", said Indonesian Commodity and Derivatives Exchange (ICDX) analyst Revandra Aritama when contacted in Jakarta, Friday, January 13.

Market Expectations

US inflation in December 2022 slowed to 6.5 percent (YoY) from 7.1 percent (YoY) in the previous month. The slowdown was in line with market expectations. In addition, core inflation also slowed to 5.7 percent (YoY) compared to the previous 6 percent (YoY).

Macro Equity Strategist Samuel Sekuritas Lionel Priyadi in his study said that on the one hand, the slowdown has raised investor optimism about a potential reversal of The Fed's policy direction from currently maintaining interest rates at 5.25 percent until early 2024 to cutting interest rates starting in the fourth quarter of 2023.

However, on the other hand, investors are concerned that the slowdown may lose momentum due to persistently high service sector inflation.

"Overall, we see the slowdown in inflation as a momentum for The Fed to slow the pace of interest rate hikes to 25 bps on February 1 from 50 bps in December 2022", Lionel said as quoted by Antara.

Meanwhile, China's inflation in December 2022 rose to 1.8 percent (YoY) from 1.6 percent (YoY) in the previous month. China's PPI inflation was recorded to have reversed to zero percent from the previous deflation of 0.2 percent (YoY).

According to Lionel, the rising inflation rate in China is a positive sign for the country's economy which is experiencing a transition to living with COVID-19 from previously implementing a strict lockdown.

However, statements from WTO officials regarding undercounting the death rate from COVID-19 in China have the potential to make it difficult to predict when the transition process of living with COVID-19 in China will end.

In addition, the Chinese Government's retaliatory measures against Japan and South Korea for requiring a negative COVID-19 test for travelers from China who will enter the two countries, have the potential to increase risks for foreign investors and businesses investing in China.

"We are of the view that capital inflows to China will still be dominated by Chinese investors who previously transferred their wealth to Singapore. Foreign investors will still be cautious about opportunities in China", said Lionel.

Revandra estimates that today it will move in the range of IDR 15,000 per US dollar to IDR 15,300 per US dollar.

On Thursday, January 12 yesterday, the rupiah exchange rate strengthened 143 points or 0.92 percent to a position of IDR 15,339 per US dollar compared to the position at the previous close of trading of IDR 15,482 per US dollar.