This is What Makes the Rupiah Strong

The Indonesian Rupiah has shown remarkable strength against the US dollar over the past two months. This strengthening is partly driven by the rise in the yield of Indonesian government bonds to nearly 8%. This yield increase, coupled with controlled inflation, has widened the real profit margin for investors in Indonesian Government Securities (SUN).

According to Asiabondsonline data, the benchmark yield for 10-year SUNs is at 7.95%, while inflation until October 2018 was only 3.16%. This means a real profit margin of 479 basis points for investors. This potential profit is the largest compared to the yield-inflation differential in other countries such as Malaysia, Vietnam, and the United States. In fact, the yield-inflation differential in Hong Kong and Japan is negative.

(Read Databoks: Indonesian Bond Yields Remain Attractive)

This attractive investment yield in Indonesia has prompted global fund managers to return to the financial market. As a result, the Rupiah strengthened to Rp 14,383 per US dollar on Thursday, November 29th, according to Bloomberg data – its strongest position since July 18th. Investor gains will also increase with the appreciation of the Rupiah against the US dollar by 5.6% from its weakest level of Rp 15,238 per US dollar on October 9th.

(Read Databoks: Rising Global Uncertainty Pushes Up Government Bond Yields)