Indonesian Rupiah slips due to stronger US Dollar, soaring oil prices
- USD/IDR rises due to aggressive Fed rate-hike bets following hot US inflation reports, which continue to bolster the US Dollar.
- As a net oil importer, Indonesia faces fiscal strain and rising inflation pressures due to surging crude prices.
- Recent drone attacks forcing the shutdown of Saudi Arabia's major East-West crude pipeline have pushed oil prices to four-month highs.
USD/IDR gains ground for the third successive day, trading around 17,700 during the early European hours on Monday. The pair appreciates as the US Dollar (USD) gains support amid aggressive Federal Reserve (Fed) rate-hike bets for Wednesday’s decision following hotter US inflation reports.
The US Consumer Price Index (CPI) accelerated in August, reinforcing expectations that the US central bank will raise interest rates next week. The CME FedWatch tool suggests that the financial markets have priced in nearly an 87% probability of a quarter-point rate hike at the Fed's September meeting, up from 59% a week ago.
Data released by the Bureau of Labor Statistics on Friday showed that the US CPI rose 0.4% MoM in August, putting the 12-month increase at 3.4%. Both readings came in line with market expectations. Meanwhile, the core CPI, which excludes volatile food and energy prices, increased by 0.3% on a monthly basis, versus 0.2% prior, beating the forecast of 0.2%.
However, analysts at HSBC highlight that recent data releases have shifted the global monetary policy narrative away from the US. They note that, “cyclically, US data has disappointed since early July while data elsewhere has been firmer,” a divergence that has “prompted a dovish repricing of Fed expectations alongside a more hawkish repricing for other major central banks.” This evolving backdrop, in HSBC’s view, underscores the growing contrast between softer US momentum and relatively stronger performance in other major economies.
Additionally, the USD/IDR pair rises as the Indonesian Rupiah (IDR) struggles due to a jump in oil prices, which could further stoke inflation and weigh on Indonesia’s fiscal position as a net oil importer.
Crude oil prices are rising toward nearly four-month highs following a drone attack that forced Saudi Arabia to shut down a major crude pipeline. This disruption has heavily impacted a critical route traditionally used to bypass the Strait of Hormuz. As a precautionary measure, Saudi operations on the East-West pipeline were suspended immediately following Thursday's attacks, and officials have not yet indicated when normal operations will resume.
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.
