USD/IDR likely to trade near upper end of 14,500-14,700 range over near term, says Commerzbank

The USD/IDR currency pair is expected to trade near the upper end of the 14,500-14,700 range over the near term, according to the latest research report from Commerzbank. The Indonesian rupiah is down over 7 percent compared to the USD this year vs an average decline for Asia overall of around 4 percent. This is due to the usual suspects including high oil prices, twin deficit concerns, and liquidity outflow due to continued Fed rate hikes.

The good news are 1) the economy is still expected to expand by over 5 percent this year; 2) inflation is contained and expected to be in the middle of the 2.5-4.5 percent target rate this year; 3) a reasonable amount of FX reserves of USD118 billion in July-2018 which the central bank (BI) estimates to be around 6.7 months of imports and servicing of external government debt; and 4) an independent and proactive central bank that is focused on FX stability.

BI Deputy Governor Waluyo reiterated yesterday that the central bank will continue to be “data dependent and independent”. His comments are pertinent and a signal to the markets that BI will not succumb to political pressures even as campaigning for next year’s general election begins next month, the report added.

The rising cost of living will be a hot election topic and President Jokowi was heard making the case for lending rates to “fall, fall, and fall” given modest inflation. There may be hints for BI to hold back further hikes. However, the president’s best bet for re-election will be to allow BI the leeway to act independently and ensure FX stability and not go down the route of Turkish President Erdogan.