FX Market and IDR Bond Report - June 2015

SUMMARY
 
Top headlines for the month of June were Federal Reserve decision to delay rate increase, Greek default crisis and potential exit from Eurozone, and also China stock market meltdown. The events show that the world economy growth is still vulnerable and made US central bank to rethink about tightening its monetary policy further. This is contrary to the optimism shown in financial market in prior months.
 
Indonesia economic growth outlook has worsened. Combination of weak export, high interest rate and slowing consumer demand are weighing on the economy. Meantime, vehicle sales and banking loan growth have slowed significantly. Inflation in the fasting month even increased at slower rate compared to usual.  
 
Market is anticipating US to go for the first interest rate hike in between September and December meetings, by a cap of 50bps this year. The steeper the interest rate increases will generally strengthen US Dollar, which will also translate into weaker global currencies, vice versa. Delay in rising interest rate and smaller than anticipated increase are negative to USD bullish trend.
 
Weak economic growth and depreciating Rupiah have brought a dilemma to Bank Indonesia. While Bank Indonesia could cut interest rate to support economic growth, the move may worsen the current account outlook thus will further weaken Rupiah. On the flip side, Indonesia inflation is expected to fall to sub five percent by the end of this year and trade balance has been surplus in the last six months thus make room for interest rate cut (s). We expect BI to cut benchmark rates by 50bps this year.
 
CIMB Niaga Research & Strategy