The rupiah exchange rate was at Rp14,260 per US dollar in spot market trading on Friday. This position rose 12.1 points or 0.12 percent from Rp. 14,277 per US dollar in the previous trade. Most currencies in developed countries moved lower against the US dollar.

Data on the increase in US consumer inflation for October 2021, the highest in the last 30 years, fuelled the perception that the US central bank could raise benchmark interest rates more quickly.

Since last week, the rupiah has been under pressure from the US dollar. However, slowly finally able to escape from the pressure and strengthened again this week.

Last week, pressure on the rupiah came from the US central bank (Federal Reserve/The Fed) which officially announced tapering or a reduction in the value of the asset purchase program (quantitative easing/QE) starting this month.

Although it did not trigger the turmoil like in 2013, the announcement of the tapering still made the rupiah weaken within a reasonable limit.

Rupiah Successfully Comes Out and Strengthens

The Garuda currency was finally able to escape the tapering pressure since last Friday and continued to strengthen sharply for 2 consecutive days earlier this week.

Unfortunately, the rate of strengthening of the rupiah had to stop after the release of US inflation data, which was at the highest level in more than 3 decades. The US Department of Labor on Wednesday reported that the Consumer Price Index (CPI) for October rose 6.2% YoY.

The CPI was the largest increase since December 1990. Meanwhile, core CPI inflation, which excludes the food and energy sectors, grew 4.6%, higher than expectations of 4% and the highest since August 1991.

The high inflation in the US made the yield of US bonds (Treasury) 10-year tenor soar around 12 basis points. The increase in yields is a response from market participants who anticipate the possibility of the US central bank (The Fed) raising interest rates more quickly to reduce inflation.

Based on the CME Group's FedWatch tool, the market now sees a 43.2% probability that the Fed will raise interest rates 25 basis points to 0.25% - 0.5% in July next year.

In addition, at the end of 2022, the market sees a 31.4% probability that the interest rate will be at 0.75%-1%. This means that after the release of the inflation data, the market sees the Fed having the opportunity to raise interest rates three times next year.

Drivers of Rupiah Movement in Spot

As a result, the rupiah weakened slightly for 2 days in a row, before strengthening again in yesterday's trading. On the other hand, the hope for the revival of the Indonesian economy in the fourth quarter of 2021 will keep the rupiah's performance under control.

IHS Markit on Monday last week reported that manufacturing activity as measured by the Purchasing Managers' Index (PMI) in Indonesia in October 2021 was 57.2, up from 52.2 in the previous month. The index number is the highest record in history.

Indonesia's manufacturing sector contributes about 20% of its GDP. So that the sharp increase in the expansion of the manufacturing sector coupled with increasingly confident consumers, can certainly encourage slower economic growth in the third quarter of 2021.

Then earlier this week, Bank Indonesia (BI) on Monday announced the Consumer Survey for the October 2021 period indicating consumer confidence in economic conditions continued to strengthen in line with improving community mobility.

This is mirrored within the Oct 2021 client Confidence Index (IKK) that was recorded at 113.4, a rise from 95.5 in Gregorian calendar month 2021. The IKK uses the amount one hundred as a place to begin.

If it's higher than one hundred, it means shoppers square measure optimistic. When consumers return to their confidence in looking at the economy, they will likely increase consumption which will turn the wheels of the economy.