FX Trends Remains Important For BI Outlook

Dips in USD/IDR sub 15600 remain supported, the pair last at 15610. Overall ranges remain very tight though. There hasn't been a great deal of reaction to BI's, as expected, 25bps hike yesterday.

• Still, FX remains front and centre of BI thinking. The central bank unveiling a new tool to attract export receipts back into the local currency. BI Governor Warjiyo stated the central bank will offer attractive yield to entice such earnings.
• IDR has been an underperformer through Q4 to date, -2.43%, the worst in EM Asia. The IDR NEER (J.P. Morgan Index) has fallen nearly 8% from its late September peak.
• Whilst BI appears confident in headline inflation returning to target in 2023 and core inflation remaining broadly benign, further rate hikes could still be warranted from a financial stability/IDR standpoint. A lot will depend on how the currency and Fed policy evolves in the early parts of 2023. The sell-side consensus looks for further hikes in Q1 next year.
• The cross-asset space isn't providing much impetus for IDR strength either. Local equities are down further (-0.25%), while the Citi terms of trade proxy has slipped further. Higher US real yields will also be a constraint for the currency, although to be fair, the beta between USD/IDR and the US real 10yr has been fairly modest through the course of December.