Economists at Société Générale expect the USD/IDR pair to edge higher and, therefore, any rupiah rally should fade.

Fade the rallies

“Higher commodity prices have widened the trade surplus in recent months and have helped the IDR remain resilient. Fed tapering-related upside risks to the USD/IDR are pretty much priced in now. However, a compressing yield differential is a risk to an already weak bond inflow.”

“Amid muted inflationary pressures, we believe that Bank Indonesia’s limited room for policy normalisation, especially in the context of diverging policy objectives vs the US, will be detrimental to the IDR in the medium-term. As such, we expect BI to deliver a first hike in the second half of next year.”

“Despite early signs of recovery, we prefer to fade any IDR rallies, since the medium-term risks, such as a Chinese slowdown, will far outweigh any short-term gains.”