DIGIVESTASI - The potential for a recession in the United States is strengthening the value of the Indonesian rupiah against the US dollar. According to Refinitiv data, the rupiah was trading at Rp 16,110/US$ at 12:04 PM WIB on Wednesday (7/8/2024), appreciating by 0.31% from the previous close of Rp 16,160/US$.

Edi Susianto, Head of the Monetary Management Department at Bank Indonesia, stated that the rupiah's exchange rate against the US dollar could continue to strengthen as the likelihood of a US recession increases.

Find more news and articles on Google News

"Yes, it could happen. Currently, it’s already around Rp 16,120," said Edi at the Supreme Court Building in Jakarta on Wednesday (7/8/2024).

The US recession indicator, known as the Sahm Rule Indicator, has been consistently rising. The Sahm Rule data has increased for three consecutive months since May 2024, reaching 0.53% in July 2024.

Historical data shows that once the Sahm Rule warning appears or its value reaches 0.50 percentage points, unemployment rates tend to rise. Data from Bank of America (BofA) indicates that since 1953, the Sahm Indicator has always accurately predicted recessions.

The CME FedWatch Tool survey also suggests that the Federal Reserve is likely to cut interest rates sooner, potentially at its September meeting.

If this happens, the pressure on the rupiah will decrease as foreign capital flows out of the US and into emerging markets.

Edi believes this situation will further strengthen the rupiah moving forward. The possibility of the rupiah trading below Rp 16,110 remains open because the exchange rate is still undervalued or below market value. "The opportunity is very open, quite significant," Edi emphasized.

Andry Asmoro, Chief Economist at Bank Mandiri, shares a similar view. He stated that with the growing likelihood of a US recession, the chances of the Federal Reserve lowering its benchmark interest rate sooner this year are increasing.

"The expectation of a rate cut is growing. If it happens in September, it will be positive for the rupiah and reduce bond yields," Andry said.

However, he stressed that the rupiah would not immediately return to around Rp 15,000 in the near future, even if a US recession occurs. Volatility will remain significant if it drops to that level quickly.

"It will still be held back by sentiment; it won’t be swift because something that moves quickly tends to have less favorable volatility," Andry concluded.