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During May, the Indonesian rupiah strengthened against the US dollar from 14,440.0 to 14,280.0. Nonetheless, the sentiment turned sour due to the deterioration of the COVID-19 pandemic in the region, leaving IDR vulnerable in the near-term, according to economists at MUFG Bank.

Rupiah remains vulnerable to bouts of sell-offs

“Indonesia is one of the few countries within ASEAN+India to maintain a steady number of COVID-19 cases daily in May, albeit at elevated levels, as opposed to fresh peaks seen in a few countries in the region. Even if this trend continues, it does not mean that the rupiah will not be vulnerable to fragile risk sentiment in the region.”

“The seasonal corporate dividend repatriation also remains at play between Q2-Q3, which would weigh on the rupiah.”

“The need to preserve rupiah stability will be one of BI’s main considerations in maintaining the benchmark seven-day reverse repo rate at 3.50% in the coming months. While standing pat on rates, BI is expected to continue to use other policy tools such as QE and debt monetisation to support the economy.”

“Factors that could dampen downward pressure on the rupiah include US dollar weakness and larger trade surpluses driven by the commodity boom. This should lead to a narrower current account deficit in Q2 following Q1’s $997mn.”