MUFG’s Lloyd Chan notes that the Indonesian Rupiah has underperformed recently as macro fundamentals such as a widening current account deficit, rising fiscal risks and policy concerns weigh on sentiment. However, following Bank Indonesia’s 50bp rate hike and easing inflation, Indonesia’s 3‑month FX carry has improved, enhancing Rupiah appeal. MUFG highlights that technical and valuation factors now point to growing risks of a USD/IDR reversal.

Rupiah weakness versus improving carry

"The Indonesian rupiah has been one of the worst-performing currencies in the region over the past week. Macro fundamentals continue to drive the weakness, including a widening current account deficit, rising fiscal risks, and deteriorating sentiment towards policymaking, particularly amid plans for greater government control over selected commodity exports."

"While policymakers are set to discuss the state finance bill, there are no indications yet of any changes to the 3% of GDP budget deficit cap. Policy response is becoming more supportive at the margin."

"Following the jumbo 50bp BI rate hike in May and a normalization in inflation in April, Indonesia’s 3-month FX carry has risen notably, reflecting Bank Indonesia’s efforts to enhance the rupiah’s attractiveness. At the same time, from a technical and valuation perspective, risks of a reversal in USDIDR are beginning to build."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)