Indonesian Rupiah: Depreciation trend persists as oil shock weighs – MUFG

The Indonesian Rupiah continues to depreciate, despite a slowdown in the pace of decline, as a lingering oil shock exerts downward pressure. USD/IDR has retraced nearly 500 points from its peak, as investors unwind long positions and some foreign inflows return, but high US yields and elevated oil prices remain significant obstacles.

MUFG forecasts the Rupiah to reach 18,350 against the US Dollar by the end of 2026. Indonesia's trade balance remains strained, with the goods trade balance returning to a modest surplus in July, but still far below the 2025 average. Surpluses in coal, palm oil, and base metals are only partially offsetting the impact of the oil shock.

Brent's current price above $90 per barrel is likely to maintain trade balance pressures, preventing a sustained Rupiah appreciation. Foreign ownership of SRBI has risen to around 27%, near late-2024 highs, but yields are easing from their June peak as the effectiveness of BI's strategy to stabilize USD/IDR could be waning amid rising US yields and oil prices.

Risks such as MSCI's removal of GoTo from the Indonesia index and the uncertain direction of state-led commodity export reforms under Danantara Sumber Daya Indonesia (DSI) cast doubt on a structurally bullish Rupiah outlook. Accelerated headline inflation to 3.19% year-over-year and persistent core inflation suggest further Bank Indonesia rate hikes may be necessary if energy and food price pressures persist.

Meanwhile, USD/JPY rebounds off multi-month lows, approaching 156.00 ahead of the Asia session's opening bell, while AUD/USD hits fresh four-month highs above 0.7200. Gold also gains as the US Dollar weakens, pushing the precious metal above $4,500 per troy ounce. The US diesel crack spread recently surpassed $100 per barrel, indicating a strong message from the oil market.