Macro Strategy: The Currency Conundrum

Macro Strategy

The Currency Conundrum

IDR remains weak despite foreign inflows, driven by fiscal concerns, DXY rebound, and limited BI excess rupiah liquidity absorption.
Fed signals January rate hold as growth remains solid, labor cools, and easing potential points to later 2026.
US tariff uncertainty persists, but Indonesia remains largely insulated; adverse rulings may pressure USD , potentially easing pressure on IDR.

Perplexing Weak IDR Despite Robust Foreign Flows. Despite a strong market trend and ongoing foreign inflows into both fixed income and equities, the IDR has remained weak, a perplexing outcome compared with historical correlations. Over the past week, the IDR weakened further, closing at IDR 16,885 per USD and moving closer to the psychological 17,000 level, which has raised market concern. While fiscal expansion and monetary easing often lead to currency weakness, we believe additional factors are currently contributing to the softer IDR:

The Fiscal Deficit Worry. Early-2026 sentiment has been weighed by concerns over a wider fiscal deficit following the preliminary FY2025 outcome of 2.92% of GDP and larger debt issuance, which raised questions around funding needs. These concerns have since been addressed, with the Ministry of Finance reaffirming its commitment to keep the deficit below the 3% cap, while larger issuance at the start of the fiscal year is a regular front-loading practice aimed at securing funding early, not an indication of rising fiscal stress. Last year S&P’s decision to affirm Indonesia’s BBB rating with a stable outlook reflects confidence in continued fiscal discipline and underscores the importance of maintaining the deficit within established limits.

DXY Rebound. The DXY strengthened to around 99.3 after staying below 99 through December, supported by expectations that the Fed will hold rates and by stronger US data. Among major currencies, most central banks were on hold, with the BoE cutting rates and the BoJ raising rates to the highest level since 1995. The US debasement trade that dominated last year, built on expectations of a weaker USD, appears to be losing momentum. We also note the previously large net long positions in the Yen have recently reversed into a net short position, based on CFTC data.

Larger liquidity, limited absorption. Since the October meeting, Bank Indonesia has emphasized stability while enhancing rate transmission. A brief increase in SRBI auction frequency in late November, often seen as part of efforts to maintain IDR stability, was intended to absorb excess liquidity but lasted only two weeks. Since then, SRBI yields have eased back to around 4.7%, in line with lower 1-year INDOGB yields, and awarded amounts have declined, indicating that BI is no longer meaningfully tightening rupiah liquidity through SRBI operations.

No Near-Term FFR Cut. Fed messaging ahead of the January meeting points to a clear hold. Chair Jerome Powell pushed back against recent DOJ-related pressure by reaffirming the Fed’s independence and emphasizing that rate decisions will remain driven by economic data rather than political influence. Other officials reinforced a balanced, data-dependent approach, while Stephen Miran argued that policy remains overly restrictive and called for substantial easing to support the labor market, highlighting a still-divided Fed. Markets have largely priced a January pause, reflected in a modest DXY firming. Looking into 2026, we still see scope for easing as inflation moderates, potential fiscal support emerges around the mid-term elections, and possible leadership changes later this year tilt policy more dovish.

The current backdrop remains mixed, activity is solid, but labor conditions continue to cool. US growth strengthened into late 2025. GDPNow estimates 4Q25 growth at 5.3% annualized, following a 4.3% expansion in 3Q25, driven by resilient consumption and a positive net trade contribution. Fitch raised its 2025 GDP forecast to 2.1% y-y on stronger consumption, government spending, trade, and IT investment. In contrast, labor momentum softened: December payrolls rose just 50K, full-year gains slowed sharply to 584K, and job openings fell to 7.15 mn, signaling cautious hiring despite a lower unemployment rate. Inflation stayed contained, with headline CPI at 2.7% y-y and core at 2.6% y-y, supported by lower energy prices offsetting firmer food and services inflation

Trade Policy Uncertainty Persists. Uncertainty around US trade policy remains elevated after the Supreme Court postponed its next ruling on Trump-era tariffs to January 20, with a further delay into February possible due to the court’s recess. In 2025, lower courts ruled the tariffs were issued illegally, but they have remained in force to give the administration time to respond. Hearings in November suggest the Court is skeptical that the 1977 International Emergency Economic Powers Act (IEEPA) grants broad authority to impose tariffs, raising the risk of an adverse ruling and a move to alternative legal tools.

For Indonesia, the impact is expected to remain limited under most scenarios, even if IEEPA is overturned and replaced by other measures:

Section 122: Allows temporary tariffs of up to 15% for a maximum of 150 days. This would be less restrictive than the current effective rate of about 17% and is time-limited.
Section 301: Enables tariffs following unfair trade investigations. Indonesia is not a primary target, as US trade deficits are concentrated with China, the EU, Mexico, and Vietnam.
Section 232: Permits industry-based tariffs on national security grounds. Indonesia’s share of most US import categories is small, and substitution risks, particularly for palm oil, limit the likelihood of aggressive action.
Section 338: An outdated 1930s provision allowing retaliatory tariffs of up to 50% without lengthy reviews. It has never been used and would likely face strong legal challenges.

A court defeat could also raise US borrowing needs, as tariff revenues have helped offset funding requirements. Higher issuance of long-dated Treasuries would likely push up long-end yields, steepen the curve, and be less supportive for sustained USD strength, potentially easing pressure on the rupiah.

Capital Market: UST Yield Flattening is Forming. Global and domestic markets. UST yields moved in opposite directions, with the 10-year easing by 2 bps to 4.17% while the 2-year rose 7 bps to 3.56%, resulting in further yield curve flattening. Domestically, the 10-year INDOGB yield climbed 13 bps to 6.25%. The DXY strengthened by 0.23% to 99.16, while the IDR weakened 0.55% to 16,885 per USD. Indonesia’s 5-year CDS widened 2 bps to 72 bps.

Fixed Income Flows. The Ministry of Finance reported that foreign investors recorded weekly net inflows of IDR 4.50 tn into the government bond (SBN) market, lifting total foreign ownership to IDR 884 tn. On an MTD basis, cumulative foreign inflows reached IDR 5.35 tn. On the domestic side, the banking sector posted weekly inflows of IDR 28.14 tn, with MTD inflows amounting to IDR 82.27 tn. In contrast, Bank Indonesia, excluding repo transactions, recorded weekly outflows of IDR 18.98 tn and MTD outflows of IDR 74.85 tn. Meanwhile, mutual funds registered inflows of IDR 4.72 tn, while insurance companies and pension funds collectively posted weekly inflows of IDR 11.92 tn.

SRBI Flows. SRBI outstanding increased by IDR 7 tn w-w to IDR 735 tn. Foreign investors recorded weekly net inflows of IDR 5.9 tn, though YTD flows remain negative at IDR 6.16 tn, leaving foreign holdings at IDR 111 tn, about 15% of total SRBI outstanding.

Equity Flows. Foreign inflows strengthened further in the second week of January 2026, reaching IDR 3.4 tn and lifting cumulative MTD inflows to IDR 6.5 tn. This sustained foreign buying momentum supported equity market performance, with the JCI briefly touching a new all-time high around the 9,100 level last week. At the stock level, inflows remained concentrated in several large-cap names, with ANTM, INCO, ASII, BBRI, and PTRO emerging as the top five stocks showing the most consistent foreign accumulation.

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