Macro Strategy: Currency Conundrum

Stock Code	Last Price	Change	Change %
DSSA	50.900	2.650	5,49%
CTBN	5.300	450	9,28%
SMMA	15.800	400	2,60%
CUAN	8.875	350	4,11%
SINI	3.500	310	9,72%
BESS	1.495	240	19,12%
NICL	1.055	175	19,89%
SGRO	2.570	170	7,08%

Macro Strategy

Currency Conundrum

Unlike in Oct 23, the UST and INDOGB yields were stable despite the current IDR weakness while DXY strengthening moderated.
BI now has a wider array of intervention tools underpinned by improving liquidity in the system and rising Forex Reserves.
Our study reveals a fundamental IDR range of IDR15,432 - 15,626 per USD, implying the recent weakness overshot on the upside.

Rising Currency Risk. We observed a distinctive pattern last week as the IDR weakened to a level last seen in Oct 23 during a period of heightened global volatility. Nonetheless, the recent weakness lacked negative drivers, as was the case in October. During that period, the 10-year UST approached 5% (versus the current 4%), and the DXY hovered around 106-107 (versus 103 in the current period). Our study during that time led to a worst-case scenario of a 7.5% 10-year INDOGB yield and IDR16,032/USD for the USD/IDR exchange rate, which was then responded to by a 25bps rate hike by Bank Indonesia.

In the current period of IDR depreciation, the yields on the UST and INDOGB do not seem to exhibit signs of rising volatility. The yield on the 10-year INDOGB only moved within a mere 5bps range last week, a significant contrast to the 40bps weekly increase in mid-October. Furthermore, the Dollar Index (DXY) only rose 2 points YTD and continued to remain stable despite the recent release of stronger 4Q23 US GDP growth of 3.3%, surpassing the consensus of 2% but still indicating a slowdown from the previous quarter. Also, the release of Core PCE, the Fed’s primary inflation gauge, which fell to 2.9% in Dec 2023 from Nov’s 3.2% will lead to a more stable DXY trend. The last time the Core PCE was below 3% was back in March 2021.

On the domestic front, the escalation of geopolitical tensions in the Red Sea (pls refer to our report “Permeating Risk Landscape” – 22 Jan 2024) led to an increase in energy prices. Typically, this prompts a surge in oil imports, thereby increasing the demand for USD. WTI prices have risen by 11.4% year-to-date, reaching USD78 per barrel. Increased imports activity could also potentially contribute to a deterioration in the trade surplus, serving as another negative catalyst for the IDR.

Wider array of intervention tools. We perceive the current episode of IDR weakness as more transient, mainly driven by the market's repricing of FFR higher-for-longer conditions. In our view, BI currently possesses an enhanced arsenal of intervention tools to stabilize the IDR. Back in Oct 23, BI faced constraints with limited tools due to a moderation in the Forex Reserves, lower system liquidity restricting BI's contraction policies, and significant outflows in the bond market. Consequently, BI opted to raise rates to send a strong signal to the market regarding its commitment toward supporting the IDR. Encouragingly, the fundamentals have largely improved recently, with higher FX Reserves attributable to recent global bonds issuance, foreign loans, and portfolio inflows in 4Q23. Domestic forex liquidity is also higher, as evidenced by a lower TD Forex Rate. As such, BI will be able to deploy both contractionary policies and direct IDR intervention. On the former, we note a persistent increase in the outstanding Open Monetary Operations conducted by BI, especially on SRBI, which saw weekly average bids of IDR35tn in Jan 2024 (compared to IDR20tn in Dec 2023). Net foreign inflows to SRBI have reached IDR18.9tn year-to-date, surpassing the combined total of foreign inflows to bonds (+IDR7.11tn) and equities (+IDR7.35tn).

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