FxWirePro: BI outpaces rate cut; IDR drifts in narrow range – Hedge USD/IDR upside risks via 3m NDFs

We discuss the reasons behind USDIDR stability but see a modest rise towards year-end 2017. In addition, we believe the INR is sensitive to the more hawkish tones emanating from other major central banks and is exposed to a slowdown in portfolio inflows. Elsewhere, our Cyclical, Structural and Political FX framework suggests the KRW is unlikely to keep outperforming in Q4’17.

Consensus was caught wrong-footed by Bank Indonesia’s 25bp rate cut on Friday (the vast majority of analysts expected no change). However, BI was destined to cut again this year so it simply fast tracked future policy moves.

The policy statement highlighted that “Bank Indonesia views that the current level of policy rate is sufficient in accordance with the forecast of inflation and other macroeconomics”. They did not mention this in the previous statement, suggesting that the bar for future easing might be high unless growth or inflation disappoint.

Against a favorable EM backdrop we don’t see USDIDR meaningfully below 13,100 given BI’s policy bias unless there is a big EM risk-on phase. Bonds are expensive on our macro fair-value model but the global hunt for yield and positive external position prevents a correction.

IDR, SGD, TWD and CNH all screen as decent ratio USD put buys; CNH is the most preferred candidate of the four given a known policy dimension to aid the case of directional strength over and above pure carry considerations.

Alternatively, longs in USDKRW NDFs are also encouraged with a view to arrest upside risks, so, add long in USDIDR NDFs of 3m tenors at 13325, we see upside risks upto 13600 and a stop at 13118. The time horizon is 1-3 months and positive carry is approximately 2bp/month.