(Bloomberg) -- Indonesia expects the rupiah to withstand rising financial market volatility, with the central bank confident it will strengthen.
The rupiah is likely to remain highly volatile in the short term, Edi Susianto, executive director of monetary and security asset management at Bank Indonesia, said in a text message on Wednesday. Pressures are mainly seen to stem from sentiment surrounding the Federal Reserve’s policy rate easing and the US election results.
However, the central bank is confident that the rupiah will strengthen going forward “on the back of the optimism of the new government and our efforts to increase the attractiveness of domestic financial assets,” Susianto said. Bank Indonesia also stands ready to step into the market to curb excessive volatility and ensure a balance of FX supply and demand, he added.
The rupiah, along with other Asian currencies, has been under pressure throughout October as the market lowered its expectations for an aggressive Fed rate cut and priced in the possibility of Donald Trump winning the presidential elections.
Rupiah chalked losses for three days in a row as it fell 0.4% to 15,620 against the greenback on Wednesday. It’s lost over 3% this month, forcing the central bank to enter the markets on Tuesday with a second confirmed round of intervention in just two weeks to smooth out the volatility.
“Upcoming US elections add to jitters as markets eye the probability of fresh trade barriers fueling inflationary pressures and, consequently, a less dovish Fed,” DBS Group Holdings Ltd. senior economist Radhika Rao said in a Wednesday note. Global developments hold a larger sway in Indonesian assets movement as markets were neutral to Indonesia’s new cabinet line-up, she added.
“Volatility in the rupiah and IDR rates is bound to continue over the coming fortnight, against this backdrop and trickle of relatively firmer US data, compelling the central bank to temper its dovish talk,” Rao said.
Bank Indonesia left its key rate unchanged at 6% in its meeting this month as it turned focus back to rupiah stability. Governor Perry Warjiyo has said that room for further monetary easing will depend on the outlook for the currency, inflation and economic growth.
(Updates with chart and analyst comment)
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