USD/IDR: Risks remain tilted towards the downside for the rupiah in the near-term – MUFG

During May, the Indonesian rupiah strengthened against the US dollar from 14,440.0 to 14,280.0. Nonetheless, the sentiment turned sour due to the deterioration of the COVID-19 pandemic in the region, leaving IDR vulnerable in the near-term, according to economists at MUFG Bank.

Rupiah remains vulnerable to bouts of sell-offs

“Indonesia is one of the few countries within ASEAN+India to maintain a steady number of COVID-19 cases daily in May, albeit at elevated levels, as opposed to fresh peaks seen in a few countries in the region. Even if this trend continues, it does not mean that the rupiah will not be vulnerable to fragile risk sentiment in the region.”

“The seasonal corporate dividend repatriation also remains at play between Q2-Q3, which would weigh on the rupiah.”

“The need to preserve rupiah stability will be one of BI’s main considerations in maintaining the benchmark seven-day reverse repo rate at 3.50% in the coming months. While standing pat on rates, BI is expected to continue to use other policy tools such as QE and debt monetisation to support the economy.”

“Factors that could dampen downward pressure on the rupiah include US dollar weakness and larger trade surpluses driven by the commodity boom. This should lead to a narrower current account deficit in Q2 following Q1’s $997mn.”