USD/IDR: Indonesian rupiah likely to strenghten, vulnerable to a tighter Fed monetary policy – Wells Fargo

The Indonesian rupiah will likely appreciate gradually versus the US dollar over the next quarters according to analysts at Wells Fargo. They forecast the USD/IDR at 14400 during the second quarter, at 14300 in the third quarter and at 14100 by the first quarter of next year. 

Key Quotes: 

“We still forecast a stronger currency over time; however, risks around our forecast are tilted toward a weaker rupiah. The rupiah is particularly vulnerable to tighter Fed monetary policy as a large portion of the government's debt burden is denominated in U.S. dollars and foreign investors hold a sizable amount of sovereign debt. Given the Fed's more hawkish “dot plot,” earlier tightening from the Fed could result in a sharp depreciation of the rupiah.”

“Confirmed COVID cases in Indonesia are on the rise once again. Recently, Indonesia experienced the most daily cases on record, which should complicate and extend the local recovery timeline. To that point, activity indicators remain suppressed, while Q1 GDP data improved, but came in below consensus expectations.”

“On a more positive note, Bank Indonesia recently held rates steady despite potentially having room to cut interest rates if it chooses to. In addition, the central bank continues to suggest the currency is undervalued and is committed to maintaining a stable rupiah going forward. Central bank intervention should help support the currency over the short-to-medium-term, while we also believe it is unlikely the central bank cuts interest rates in an effort to protect the value of the currency.”