Macro Strategy: How Low Can We Go?

Stock Code	Last Price	Change	Change %
MFIN	4.010	660	19,70%
DSSA	46.425	550	1,20%
TCID	2.250	445	24,65%
ADMF	9.050	375	4,32%
PANI	11.550	275	2,44%
ADES	11.175	225	2,05%
LPPF	1.930	210	12,21%
CUAN	7.125	150	2,15%

Macro Strategy

How Low Can We Go?

The current IDR weakness has different catalysts from those in Oct last year. The surge in dividend repatriation in 2Q necessitates vigilance.
A weaker JPY and CHF are primary reasons for the stronger DXY recently, as the Fed Dot Plot still suggests 3 rate cuts this year.
Bank Indonesia appears to be raising its contractionary policy with OMO surged to two months high in a bid to stabilize IDR.

Specter of IDR weakness. The recent movements in the IDR approaching the Rp15,800/USD level resemble what happened in Sep-Oct last year when global yield volatility was rising. This time around, while foreign outflows in government bonds are similar, global yields exhibit greater stability, thus pointing to different risk catalysts that spur outflows. Our assessment of the situation is as follows: 1.) As was the case in Sep-Oct 2023 when there were foreign outflows in the bond market of IDR32.2tn, we have already seen Rp33.1tn exiting the INDOGB market in the past two months. Yet despite these outflows, yields have only risen by 14 bps compared to the 73 bps increase seen last year, partly due to BI’s aggressive buying. In our view, the recent outflows were mainly triggered by the fiscal outlook leaning toward an expansion of the deficit; and 2.) During the Sep-Oct 2023 period, our study revealed that yield escalation was the key driver of volatility, with worst-case yields of 7.5% for INDOGB and 5.5% for UST suggesting that the IDR would breach the Rp16,000/USD level. However, looking at yields on INDOGB and UST at present, the underlying factors are nowhere near as concerning, and rate trajectories appear to be relatively more certain.

As such, in our view, the current IDR weakness mostly stems from external factors. However, as we move into the second quarter, dividend repatriation typically emerges as the primary negative catalyst exerting pressure on IDR stability, necessitating vigilance.

Rising Cross Currency Volatility. While US economic strength is not surprising, we believe there are other non-US factors at play behind the recent stronger Dollar Index (DXY). In our view, the weakness of other major currencies is the primary factor. Of the six major currencies that are paired against the USD within the DXY, the Swiss Franc (CHF) and the Japanese Yen (JPY) have weakened considerably against the USD, although the former has a relatively lower weighting in the index. The Swiss Central Bank (SNB) took the unexpected step of cutting rates, preceding other major central banks. Additionally, while the Bank of Japan's rate hike was expected to bolster the JPY, it has been unable to do so significantly, as the BoJ continues to prioritize an accommodative stance. As a result, the JPY has depreciated to its lowest level since 1990. The recent hawkish commentary from Fed members also supportive for the strength of DXY.

BI’s Response. While the recent BI’s current monetary stance may have leaned towards more pro-growth stance, we observe recent surge in BI's contractionary policy. To stabilize the IDR, the outstanding Open Market Operations (OMO) rose to IDR824tn (as of 27 Mar), marking a two months high. Nonetheless, BI continues to add its bond position, totaling IDR161tn during the Feb-Mar period. Consequently, banks are able to accumulate IDR liquidity. In our view, it is plausible for the IDR to continue to move closer the Rp16,000/USD level without a surge in bond yields. In the event of a further deteriorating IDR outlook, BI has more instruments available in hand, especially for the implementation of more extensive contractionary policies, shifting away from the rate hike option undertaken by BI back in Oct 2023.

Capital Market – Weaker IDR led to higher outflow momentum

Rising market volatility - While the 10-year US Treasury yield declined 7 bps to4.20% (28th Mar). the yield on Indonesian Government Bonds (INDOGB) with a 10-year maturity rose by 8 bps, reaching 6.71%. The ongoing weakness of the IDR continues to sustain elevated levels of foreign outflows, with year-to-date outflows now totaling IDR33tn. With 0.64% appreciation in the DXY last week, the IDR depreciated by 1.25%, closing at Rp15,855 per US dollar. Furthermore, we also note rising 5-year Indonesian Credit Default Swap (CDS) of 2 bps to 73 bps. JCI also down 0.7% w-w, mainly on the reversal of foreign inflow, with big caps such as TLKM, BBCA, BMRI and ASII all saw surge of foreign outflow.

Flow Trend – Based on the latest Ministry of Finance (MoF) data os of 27th March, we note that foreign ownership of INDOGB continue to trending dowm, with another outflows totaling Rp9.68tn, reducing the total foreign ownership to Rp808.75tn. Month-to-date (MTD) outflows amounted to Rp28.38 tn. Similary, the banking sector also sustained its outflow mode, with weekly outflows of Rp22.47 tn (MTD outflows: IDR87.26 tn). Bank Indonesia (Excluding Repo) continue to support yield stability with another weekly inflows of IDR31.17tn (MTD inflows of IDR29.26tn). Notably, mutual funds also experienced weekly inflows of IDR750 bn, while insurance and pension funds observed an inflow of IDR6.98tn.

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