FX Notes - IDR: Short-Term Relief

IDR: Short-Term Relief

      The USD/IDR has had a good run since 6 Apr, first dipping below the 13000-levels on the back of dollar weakness and when BI kept its policy rate unchanged on 14 Apr with a slightly hawkish tone in its policy statement. The USD/IDR then had another leg down pass the 12900-levels when the trade surplus hit a record USD1.13bn in Mar (Feb: USD0.67bn), a surplus not seen since Feb, and has since hovered around that region. Also keeping the pair lower for the time being is the expected improvement in the current account deficit (CAD) in 1Q15. The central bank expects 1Q15 current account deficit to come in at 1.6% of GDP in 1Q15, a level not seen since 2012, helped by IDR depreciation.

      However, we believe that this euphoria, buoyed by the record trade surplus in Mar, could be short-lived. A closer examination of the trade data for Mar suggested that the underlying economic fundamentals of the economy might not be as sanguine. Both exports and imports remained in the doldrums, contracting for the six straight month by 9.75% and 13.4% y/y in Mar. So while this has resulted in a record trade surplus that should lower the CAD to 1.6% of GDP, the weak trade prints do not bode well for the economy. Both the weak export and import prints suggested that economic growth could remain anemic ahead, particularly in 1Q.

      Moreover, this trade surplus might not be sustainable, in particularly if infrastructure expenditure should proceed. This could see a resurgence in demand for imported material that should ignite a revival in imports. Should exports remain lackluster as imports rebound, the trade surplus is likely to deteriorate. This in turn could see the CAD rebound much higher than 1.6% of GDP in 2Q and could widen even more should the income account deteriorate as well on the back of a jump in dividend repatriation. Our economic team still expects CAD to come in at 2.54% of GDP by end 2015.

      For now, broad dollar weakness underpinned by market expectations that a USD Fed fund rate in Jun could be delayed (though our base case is for a Sep start to the rate hike) should keep the USD/IDR heavy in the near term. However, with the likely rebound in the CAD and continued lackluster growth beyond 1Q, and that a Fed rate hike in Sep remains intact, upward pressure on the USD/IDR is expected to continue. We maintain our forecast for the USD/IDR for 2015 for now. 

Forecast	2Q 2015	3Q 2015	4Q 2015	1Q 2016
USD/IDR	13150	13400	13500	13250