USD/IDR: Upside risks widen on fiscal concerns – MUFG

Lloyd Chan at MUFG highlights that USD/IDR has broken to fresh highs, overshooting earlier expectations for near-term stabilization. The move is attributed more to domestic confidence and fiscal uncertainty than broad US Dollar (USD) strength. While upside risks have increased, MUFG also flags growing signs of Rupiah undervaluation and potential constraints from Bank Indonesia’s policy response.

Domestic confidence shock drives USD/IDR

"USD/IDR has reached fresh all-time highs around 17,300 level. This overshoots our prior near-term stabilisation view around 17,000. This move appears less about global USD strength and more about a domestic confidence shock, with markets likely reacting to heightened fiscal uncertainty."

"In the near term, upside risks to USD/IDR have clearly widened, with sentiment still fragile. The speed and direction of the latest move suggest markets are demanding a higher risk premium, particularly as oil prices remain elevated and fiscal-energy dynamics stay unfavourable."

"However, at the same time, valuation signals are becoming increasingly compelling, pointing to meaningful rupiah undervaluation versus the US dollar, while technical indicators show USD/IDR moving into overbought territory. Policy response functions could become more binding, with Bank Indonesia firmly focused on rupiah stability. Indonesia’s sovereign CDS spreads have not shown the kind of blowout typically associated with a loss of macro anchor."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)