Economists at Société Générale expect the USD/IDR pair to edge higher in the coming months though high COVID-19 numbers have got limited market reaction. Overall, risks are skewed to upside for USD/IDR.
Third wave and faltering growth recovery
“Localised spikes in COVID-19 cases have had a diminishing impact on Asia FX, especially high yielders. That said, a worsening pandemic and slow vaccination should be interpreted as bearish for the currency. A faltering growth recovery is detrimental to the IDR.”
Monetary policy
“Bank Indonesia (BI) kept its policy rate on hold at the July MPC, signalling a pro-growth policy into 2022. With BI foreseeing no policy normalisation until 2H22, monetary policy support for the IDR has peaked. We view possible faster Fed policy normalisation vs the BI as detrimental to the IDR in the medium-term.”
Dollar factor
“The spread of the Delta variant and consequent risk-off sentiment should sustain the dollar’s strength and upside pressure on USD/IDR. Risk-on periods would be positive for the IDR, but any rallies should be limited by higher US yields and talk of tapering. With the DXY forecast at 94 one year ahead, we see room for USD/IDR to grind higher (~14,700).”
