Indonesian Rupiah faces pressure amid fiscal concerns

Rising oil prices and domestic fiscal outlook concerns put renewed downward pressure on the Indonesian Rupiah.
Bank Indonesia maintained its benchmark rate at 5.75% during Governor Destry Damayanti's first policy meeting.
Strong US PMI data pushed expectations for an October Fed rate hike to 69.7%, boosting USD strength.

Strong US manufacturing data boosts expectations for an October Fed rate hike to 69.7%.

USD/IDR gains ground for the second successive day, trading around 17,920 during Asian hours on Thursday. The pair appreciates as the Indonesian Rupiah (IDR) faces renewed pressure, driven by intensifying concerns over Indonesia’s fiscal outlook amid higher oil prices.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Bank Indonesia (BI) held its benchmark rate steady at 5.75% on Wednesday, matching market estimates. This marked the first policy meeting under newly appointed Governor Destry Damayanti and followed a total 100-basis-point increase across three moves in May and June, when policymakers tightened policy to support the currency after it fell to record lows against the US Dollar (USD).

The USD/IDR pair may see further upside as the US Dollar gains strength from ongoing hawkish sentiment surrounding the Federal Reserve's (Fed) policy outlook. This momentum was supported by the latest Flash US S&P Global PMI data for September, which showed manufacturing expanding faster than expected at 52.0, helping to offset minor pullbacks in composite and services activity.

Market expectations for a 25-basis-point Fed rate hike in October surged to nearly 69.7%, up sharply from 48.7% last week. Market participants are now focused on the upcoming US weekly Initial Jobless Claims report, as several Fed officials continue to support recent rate increases and warn against persistent inflation risks.

Dollar momentum extends as high beta FX underperforms

Strategists at Scotiabank report that “momentum remains with the USD,” with “broad gains against the major currencies this morning” pushing the Dollar Index to “its highest since late July.” They highlight that “high beta FX is underperforming on the day,” noting that the NZD, MXN and ZAR sit “at the foot of the overnight performance table alongside the KRW,” underscoring the breadth of the latest leg higher in the Dollar.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

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.

What are the key assets to track to understand risk sentiment dynamics?

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.

Which currencies strengthen when sentiment is "risk-on"?

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.

Which currencies strengthen when sentiment is "risk-off"?

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.

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