Macro Strategy: How High Can They Go?

Stock Code	Last Price	Change	Change %
DSSA	47,550	1,650	3.59%
DNET	11,000	1,300	13.40%
TGKA	7,250	375	5.45%
TKIM	5,600	350	6.67%
CTBN	3,650	330	9.94%
INKP	5,700	325	6.05%
CITA	4,350	300	7.41%
AADI	6,900	175	2.60%

Macro Strategy

How High Can They Go?

The Key Risk events to monitor: the 10yr-UST yield testing the 5% level, the DXY reaching 111.4, and the CNY weakening further to 7.5.
Weakening CNY has greater influence on IDR than DXY, with downside remains exist. BI’s intervention will be crucial to stem further weakness.
Further UST yield steepening beyond this level would potentially trigger greater risk to macro stability, increasingly lead to more hawkish Fed.

Risk of DXY and UST rising further? As 2025 begins, economic conditions present significant challenges, marked by the “trifecta of challenges” (refer to our report last week), which continue to gain momentum. The US Dollar Index (DXY) has further approached 110, while the yield on the 10-year US Treasury (UST) has increased by 20 bps to 4.77%, its highest level since Nov-23. These trends highlight growing market concerns, partly driven by uncertainty surrounding the policy agenda of Trump’s second presidency. Strong recent non-farm payroll data also suggests the potential for a more hawkish Fed.

As such we identify two critical levels to watch (Exh. 1 for details):

The 10-year UST yield might test the 5% level, with the DXY potentially reaching 111.4. A key driver of DXY’s persistent strength is the widening interest rate spread between the US and the currencies of its major trading partners. Current market estimates indicate this spread could widen to approximately 150 bps in 2025, surpassing the peak levels observed in the 1H24.
Adding to global economic headwinds is the situation in China with further weakening of the yuan (CNY), pushing it to multi-year lows, with potential further weakening of the CNY to 7.5 level against the USD (vs current 7.36), coinciding with a DXY level of 111.4. The current cash-rate spread between the US and China aligns with a CNY level of 7.8, last seen in 2008, reinforcing the likelihood of continued yuan depreciation.

What’s critical IDR level? Historically, the potential impact on IDR is considerable. Since 2015, the USDCNY exchange rate has exerted a greater influence on USDIDR movements than the DXY. With the expected weakening of the CNY and strengthening of the DXY, the rupiah could potentially reach 16.6 – 16.7k range in the absence of intervention. However, Bank Indonesia (BI) is well-prepared to limit excessive depreciation and keeping volatility to remain manageable. Forex reserves reached a record high of USD155.7bn in Dec24, and recent global bond issuances have further enhanced BI’s capacity to intervene in the currency market. Outflow pressures, which intensified as the IDR approached 16.3k at the end of 2024, appear to have eased. This level corresponded to the breakeven rate for significant inflows observed in Sep-24. Looking ahead, the next critical breakeven rate level is IDR16,798, associated with inflows of IDR39tn from Aug-24. This level aligns closely with the projected depreciation target. Allowing the rupiah to approach this level could risk triggering renewed outflow pressures.

Amid increasing global uncertainty, the rising yield on INDOGBs to 7.18% appears to attract greater interest from domestic institutions. According to the latest data from the Ministry of Finance (MoF), the banking sector has significantly increased its holdings, adding IDR102tn YTD, compared to the total reduction of IDR444tn made in 2024. Pension funds and retail investors have also been observed increasing their positions. In our view, if this trend continues, it could partially alleviate the pressure from foreign outflows in bond market, allowing Bank Indonesia (BI) to direct and refocus its intervention efforts elsewhere. YTD, foreign remains net buyer of INDOGB.

What Is the UST Yield Curve Implying? Beyond currency woes, developments in the UST market indicate potential shifts. The steepening trend, which began in Jun-23 when the 10-year and 2-year Treasury yield spread reached its most inverted level at -100bps, may be approaching its final phase. Since then, the spread has widened by 140bps, coinciding with a 31% rally in the S&P 500. This pattern mirrors the period from Sep-19 to Mar-21, when the spread increased by 150bps and the S&P 500 rose by 33%. Further steepening beyond this level would potentially trigger greater risk to macro stability as some of fixed rate corporate bonds issued during the near-zero interest rate period are starting to mature this year, and refinancing at current rates will impose significant costs, adding pressure on businesses.

This combination of rising refinancing costs, restricted corporate activity, and higher borrowing expenses could dampen growth expectations, potentially driving yields lower and normalizing the yield spread. Additionally, a 10bps increase in the 10-year UST yield from the current level might prompt the Fed to adopt an even more hawkish stance (Exh. 6 for details), aiming to prevent growth improvements from fueling higher inflation expectations. Oil prices have recently risen due to additional US sanctions on Russia, which could further drive-up inflation in the short term. This may push short-term US Treasury yields above the current Federal Funds Rate, signaling the possibility of an extended pause in rate cuts. These factors will play a key role in shaping capital flows in the coming months.

Capital Market – Higher Yield Trajectory Dominates Risk Catalysts. The 10-year UST yield rose 17 basis points (bps) to 4.77%, up from 4.60% the previous week. Similarly, the 2-year US Treasury yield increased by 12 bps to 4.40%. In Indonesia, the 10-year Government Bond (INDOGB) yield climbed 17 bps to 7.18%. The DXY further strengthened by 0.18% w-w approaching 110 level, while the IDR appreciated slightly by 0.03% to IDR 16,185 per US Dollar. Meanwhile, Indonesia's 5-year Credit Default Swap (CDS) rose 3 bps to 81 bps.

Fixed Income – Rising Yield Lure Investors. The Ministry of Finance (MoF) reported a weekly foreign inflow of IDR4.03tn into domestic Government Securities (SBN), bringing total foreign ownership to IDR881 tn with MTD inflows reaching IDR3.83tn, despite the recent IDR weakness. The banking sector recorded significant weekly inflows of IDR 95.02 tn, with MTD inflows totaling IDR102.12tn. Similarly, the mutual fund sector saw inflows of IDR 0.31 tn, while the insurance and pension fund sector posted inflows of IDR7.07tn during the same period. In contrast, Bank Indonesia (excluding repo transactions) experienced weekly outflows of IDR88.74tn (MTD outlfow: IDR 96.37tn), a reversal from 2024’s whereby BI add a total of IDR540.5tn of SBN.

Equity – Sustained Foreign Outflows. Foreign outflows from the equity market during the 2nd week of Jan-25 (January 6–10) reached IDR1.7tn, bringing the month-to-date (MTD) outflows to IDR2.2tn. Large banks continued to dominate the list of sectors experiencing the highest foreign outflows. The JCI declined by 1.1% week-over-week but remained relatively stable on a year-to-date (YTD) basis.

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