Indonesian Rupiah strengthens despite market caution
- USD/IDR may rebound as the US Dollar holds ground amid market caution ahead of Fed Chair Kevin Warsh’s Jackson Hole address.
- Strong inflation data increased December rate hike odds to 74%, while September rates will likely stay unchanged.
- Indonesian Rupiah may struggle due to Jakarta protests, inflation risks.
USD/IDR loses ground for the second successive day, trading around 17,750 during the early European hours on Friday. However, the downside of the pair could be restrained as the US Dollar (USD) holds ground as investors adopt a cautious stance ahead of Federal Reserve (Fed) Chair Kevin Warsh’s upcoming speech at the annual Jackson Hole symposium, where markets hope to gain clarity on the future direction of US interest rates.
The Greenback also receives support from stronger-than-expected US inflation data released earlier this week. The higher inflation figures have reinforced market expectations of another interest rate hike before the end of the year, with the CME FedWatch Tool currently pointing to a 74% probability of a rate increase in December. Conversely, traders anticipate the central bank will stand pat at its immediate September meeting, pricing in a 65% chance that rates will stay put for now.
Oil-driven move nudges US yields higher across the curve
Analysts at Deutsche Bank highlight that, “against that backdrop, bond yields crept up a bit yesterday, although that had more to do with the rise in oil and gas prices than the Fed commentary.” They note that “Treasury yields saw moderate increases across the curve, with the 2yr yield (+2.2bps) up to 4.23%, the 10yr yield (+2.9bps) up to 4.68%, and the 30yr yield (+2.6bps) up to 5.19%.”
Moreover, the Indonesian Rupiah (IDR) may face potential headwind as domestic market sentiment remains fragile. Investor caution is being driven primarily by major protests unfolding in Jakarta, which have sparked concerns over potential political unrest reminiscent of past market turmoil.
At the same time, market participants are watching upcoming economic releases and political developments closely. Key data points on the radar include August inflation figures, where El Niño-related weather risks have heightened fears of rising food costs, and July trade data, following June reports that underscored ongoing pressure from volatile global energy markets. Additionally, investors are awaiting official announcements from the House of Representatives regarding the confirmation of the candidate for Bank Indonesia governor.
Policy synergy in focus as new BI leadership prepares for five-year term
DBS Group Research argues that the hearings underscored how “the evolving economic challenges require closer coordination between fiscal and monetary authorities, given the nature of shocks, which span geopolitics to interventionist trade policies to volatility in the financial markets.” In their view, the Governor-designate’s remarks “appeared to stress that policy synergy must enhance, not compromise, central bank credibility, requiring a delicate balancing act,” with DBS also highlighting that the Governor-in-waiting is expected to “serve the full five-year term as head of the central bank.”
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.