Indonesian Rupiah
Marit Olsen
Adi Piersol
Cara Prell
Carla Villafuerte
Short Term: One Week Forecast
Taking into consideration the three technical forms of analysis, we are predicting a
weakening Rupiah over the next week. Each form of technical analysis points to
something different and because of this, our prediction isn’t certain. The currency has
been strengthening overall for the past seven months according to the Market Momentum
Approach and the 1 year chart. On the other hand, the Rupiah has reached the top of the
upper Bollinger Band which means it is overbought and is most likely going to devalue in
the future. Lastly, the Moving Average doesn’t tell us much since the currency isn’t on a
strong upswing or downswing. Mostly due to the Bollinger Band analysis, we are
predicting it will begin to weaken in the upcoming week. (Below is the information for
each technical form of analysis.)
Market Momentum Approach:
After analyzing a one year chart of the Rupiah, we can see that the currency has shown
consistent strength over the past seven months. Although it has been moving quite a bit
within the upper band, the currency has continued to strengthen. Taking only this into
consideration, it is likely that the currency will continue to strengthen, however it is
possible that the currency could weaken as seen in previous weeks but rise again.
(Inverted)
Bollinger Band Analysis:
The Rupiah has been strengthening recently but it also has been fluctuating within the
upper Bollinger Band. As of now, the currency is at the top of the upper Bollinger Band
indicating that the currency is overbought. This is a technical signal of future weakness.
According to the Bollinger Band, the Rupiah should weaken over the next week although
this is had to predict for sure.
(Inverted)
Moving Average Analysis:
When examining the Rupiah compared to its 90 day moving average we can see that the
currency dips below the trend on the way down twice. This happens once in February and
once in March. A crossover has not happened for some time. The Rupiah is currently
dancing around above the moving average line. This analysis doesn’t tell us much about
the upcoming week in regards to the Rupiah since it is not on a strong upswing or
downswing.
(Inverted)
Short-Term Forecasts (3 months into the future): Non-Parity Models
1. Asset Choice Interest Rate Differential
This model monitors the major economic and financial variables that will affect in an
increase or decrease in the demand or desire to hold particular currency.
Fiscal policy is expected to be more expansionary in 2006 as the government offers
compensation for the fuel price rises and spends to promote infrastructure development.
A recovery in investment demand will enable real GDP growth to average 5.8% a year in
2006-07. Inflation will rise in 2006 owing to the increase in fuel prices enacted in late
2005, but is likely to fall significantly in 2007 as global oil prices ease. High merchandise
trade surpluses will enable the current account to record healthy surpluses in both 2006
and 2007.
Political outlook
The arrival of 43 political asylum-seekers from Papua on Australian territory in January
has drawn international attention to events in Papua. Reports of military intimidation in
the province have been circulating for some time. If Indonesia fails to reassure the
Australian government that human rights abuses are not being committed in Papua,
bilateral relations could sour.
Economic policy outlook
Bank Indonesia (the central bank) left interest rates unchanged, for the second
consecutive month, at its meeting in early February. However, further interest rate rises
are expected in the first half of 2006, before falling inflationary pressures facilitate
interest rate reductions in the second half of the year and into 2007.
Economic forecast
The Economist Intelligence Unit has revised down its GDP growth forecast for 2006 to
5.5% (from 5.7%) amid signs that inflation will stay high for some time owing to
proposed rises in administered prices, particularly electricity tariffs, which will constrain
consumption growth for much of the year
Inverted Chart on a Horizontal & Vertical Grid with a time line of 3 Months.
1
Source: http://www.indoexchange.com/bridge/e-currency.asp
2. Balance of Payments Model
Indonesia has a well-balanced economy in which all major sectors play an important
role. Agriculture (including animal husbandry, fishing and forestry) has historically
been the dominant activity in terms of both employment and output. The country has
a vast range of mineral resources, which have been exploited rapidly over the past
three decades, enabling the mining sector to make an important contribution to the
balance of payments. The manufacturing sector began a rapid expansion in the mid-
1980s, and in 1991 the share of manufacturing in GDP exceeded that of the
agricultural sector for the first time. Recently, the services sector has expanded, and
in 2002 it accounted for 38% of GDP and employed about one-third of the working
population2.
1
USD DOLLAR - INDONESIAN RUPIAH. Retrieved from University Library on Friday, April 28,
2006 at 3:33:16 AM from http://www.indoexchange.com/bridge/e-currency.asp
2
http://www.economist.com/countries/Indonesia/profile.cfm?folder=Profile%2DEconomic%20Structure
Report
1 USD = 8810.57 IDR
One IDR = 0.0001 USD
The rates for Thursday, 27th April 2006 19:39:05 GMT3
Short-Term Forecasts (3 months into the future): Non-Parity Models
1. Asset Choice Interest Rate differential model
Indonesia
- March 2006: 6.5% repo rate (overnight lending rate to banks)
- April 2006: raised repo rate to 6.75%
U.S.
- March 2006: 5.5% Fed funds rate
- April 2006: 5.75% Fed funds rate
- A higher short term interest rates should attract foreign capital
inflows and result in strengthening over long periods of time.
- With an increase in the short term rate Indonesia will experience an
increase in short term capital and the spot rate for the Indonesian
Rupiah will strengthen in the next 3 months.
2. Balance of Payments model4
- Current account balance: $7.5 billion
- Exports: $58.8 billion
- Imports: $-35.6billion
- Indonesia is spending more on goods and services then they are
taking in therefore they are a high deficit country.
- Export is the main source for growth.
3
http://www.economist.com/markets/currency/md_conv.cfm
4
http://www.economist.com/countries/Indonesia/profile.cfm?folder=Profile%2DEconomic%20Structure
Resources
http://www.x-rates.com
http://www.economist.com/countries/Indonesia/profile.cfm?folder=Profile-Forecast
http://www.bi.go.id/web/en
http://www.cia.gov/cia/publications/factbook/geos/in.html#Econ
http://fx.sauder.ubc.ca/
3) Long term (5 years into the future) using Relative PPP model.
Using the Relative PPP I took the rate of inflation for the U.S (3%) and the rate of
inflation for Indonesia (10%). I used the relative PPP formula to calculate where the rate
of inflation for the Rupiah should be in five years.
http://www.apecsec.org.
Spot rate for Indonesia = 8810.57 IDR
The rates for Thursday, 27th April 2006 19:39:05 GMT5 according to the Economist
Annual rate inflation for U.S = 3%
Annual rate of inflation for Indonesia = 10%
Forecast for the spot Rupiah 5 years from now:
Future spot rate = 8810.57 (1+.10) ^5/ (1+.3) ^5
Future spot rate = 8810.57 (1.610 / 3.71293)
Future spot rate = 8810.57 (.4338)
Future spot rate = 3822.02
The currency is supposed to depreciate and weaken over the next five years. The current
spot rate is IND 8810.57 and it should move to IND 3822.02. According to the PPP the
Indonesian Rupiah will devalue by 56% (8810.57 – 3822.02 / 8810.57).
5
http://www.economist.com/markets/currency/md_conv.cfm
Long Term Forecast (5 years in to the future) using the International Fisher Effect
United States 5 year Treasury bond6:
MATURITY CURRENT PRICE/YIELD
COUPON TIME
DATE PRICE/YIELD CHANGE
5-Year 4.875 04/30/2011 /
99-26+ 4.91 0-03½/-.026 04/28
Indonesia 5 year Treasury bond7:
LATEST
DATE
YIELD
5-Year Govt Bond IDR 11.670 03:41am 30 Apr 2006, Manila
US Dollar / Indonesian Rupiah Spot Rate8:
CURRENCY VALUE TIME
USD-IDR 8785.0000 04/28
IFE Spot Rate for European Terms Currency = Current Spot Rate x ((1 + interest rate
foreign)n /(1 + interest rate home)n)
IFE Spot Rate = 8785.0000 * ((1+.1167)5 / (1+.0491) 5)
IFE Spot Rate = 8785 * (1.7365/1.2708)
IFE Spot Rate = 12004.3849
Forecasting the future spot rate of the USD/IDR using the International Fisher Effect
Method shows that in 5 years the Indonesian Rupiah is expected to weaken relative to the
US Dollar. The expected spot rate of the USD/IDR in five years is 12004.3849, meaning
that it will take roughly 3219 more Rupiah to equal a US Dollar. The International Fisher
Effect states that a change in the exchange rate between two countries is driven by the
differences in their interest rates. Indonesia has a relatively high interest rate compared to
the United States, so the International Fisher effect states that the Rupiah should weaken
over time.
6
http://www.bloomberg.com/markets/rates/index.html
7
http://asianbondsonline.adb.org/indonesia/indonesia.php
8
http://www.bloomberg.com/markets/currencies/asiapac_currencies.html