With the market now bullish on Indonesia, the main question for IDR is whether Bank Indonesia (BI) will limit IDR strength to 14,000 per dollar. Economists at Credit Suisse think downward momentum in USD/IDR should continue towards 13,600-13,700, though the pair could take some time to break 14,000 as markets test BI’s tolerance for FX strength.

BI will allow further rupiah appreciation, albeit gradually

“Now that the key USD/IDR level of 14,000 is fast approaching, there is a chance BI begins to accumulate USD reserves more aggressively and keeps USD/IDR stable near 14,000. However, we think the prospect of strong global demand for Indonesia’s exports, along with still-subdued domestic demand and low imports, suggest that IDR remains undervalued and that BI should allow further gradual rupiah appreciation.”

“The pre-covid low in USD/IDR was near 13,600-13,700 (in January-February 2020), when Indonesia’s trade balance was much weaker.”

“With trade and portfolio inflows now positive, we expect BI to resume FX reserve accumulation in ‘light’ amounts of $2-4 B per month. That could slow rupiah appreciation, but in our view, it is not yet clear BI aims to draw ‘red lines’ for USD/IDR at 14,000.”

“We think downward momentum in USD/IDR should continue, though the pair could take some time to break 14,000 as markets test the central bank’s tolerance for FX strength.”