IDR: Surprise BI Cut Lifts NDF Higher

   

      BI surprised the market and we with a 25bp cut each to its existing policy rate and the future benchmark rate – the 7-day reverse repo – to 6.50% and 5.25% respectively.  The BI took the opportunity of some stability in the IDR provided by the US Fed not to hike its Fed fund rate in Jun and the more gradual rate hike trajectory to reduce borrowing cost and boost growth instead, which is its primary focus now.

      The market’s reaction was swift. The 1-month USDIDR NDF was sent higher upon the announcement of the decision, even though the NDF was already climbing higher from its intraday low of 13353. The 1-month NDF jumped from 13435 levels to hit an intraday high of 13483 before easing slightly. Nevertheless, the 1-month NDF stayed elevated vs. its opening yesterday at 13415.

      For now, we maintain our USDIDR trajectory. We had initially built in a US rate hike in Jun and no BI rate cut amid Brexit concerns that would drag the pair higher towards the 13600 levels. Instead the opposite has taken place and this should still keep the USDIDR still on the uptick. We believe that the impact of the previous three rate cuts, which will visible in 3Q and beyond, as well as the push for infrastructure building by President Jokowi, and complemented by the 12 stimulus packages introduced so far, could encourage greater foreign portfolio and direct investment flows. This should help mitigate any risks from a US Fed fund rate hike this year and keep the USDIDR on a downward trajectory into 1Q 2017.