Bank Indonesia’s 50bp rate hike and easing inflation boost rupiah carry trade attractiveness amid improving technical and valuation metrics.
The Indonesian rupiah’s carry appeal has strengthened following Bank Indonesia’s 50 basis point rate hike in May and a decline in inflation. The move has lifted the 3-month FX carry, making the rupiah more attractive to investors despite recent underperformance.
Recent weakness in the rupiah was driven by a widening current account deficit, rising fiscal risks, and policy concerns. However, technical and valuation factors now suggest growing risks of a reversal in USD/IDR, according to market analysis.
While macro fundamentals remain a concern, marginal improvements in policy response and a stable budget deficit cap of 3% of GDP provide some support. The rupiah was among the worst-performing regional currencies over the past week.