Indonesian Rupiah: Depreciation trend persists as oil shock weighs – MUFG

MUFG’s Lloyd Chan argues that while the pace of Rupiah depreciation may slow, the broader weakening trend is set to continue. USD/IDR has pulled back as crowded long positions unwind and some foreign inflows return, but elevated US yields and high Oil prices remain headwinds. MUFG maintains its USD/IDR forecast at 18,350 by end-2026.

Rupiah under pressure from oil shock

"The pace of rupiah depreciation might moderate, but the broader depreciation trend is unlikely to be over. USDIDR has retraced nearly 500 points from its peak as crowded long USD/IDR positioning unwinds and some foreign inflows return. However, headwinds from elevated US yields and higher oil prices remain in place. We maintain our forecast for USDIDR at 18,350 by end-2026."

"Indonesia's trade balance remains under pressure. While the goods trade balance returned to a modest surplus in July after deficits in the prior two months, it remains well below the monthly average surplus recorded in 2025. Surpluses in coal, palm oil, and base metals are only partially offsetting the oil shock impact. Our estimates suggest Indonesia's commodity trade balance is negatively impacted once Brent rises above US$82/bbl. With Brent currently above US$90/bbl, trade-balance pressures are likely to persist, limiting the scope for sustained rupiah appreciation."

"The stronger support for IDR in the near term is portfolio inflows, but this buffer may be approaching maturity. Foreign ownership of SRBI has risen back to around 27%, close to late-2024 highs, while SRBI yields have started to moderate from their June peak. BI's strategy of raising the return on portfolio capital has been effective in stabilising USD/IDR, but its ability to drive further sustained rupiah gains may be diminishing amidst rising US yields and oil prices."

"Several macro and market risks continue to argue against a structurally bullish rupiah view. MSCI's removal of GoTo from the Indonesia index highlights ongoing concerns around market accessibility and liquidity, while uncertainty remains over the future direction of state-led commodity export reforms under Danantara Sumber Daya Indonesia (DSI). At the same time, headline inflation has accelerated to 3.19%yoy and core inflation continues to trend higher, raising the possibility of further BI rate hikes if energy and food price pressures persist."

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