Indonesian Rupiah pares losses as soft US data, Fed tone weigh on US Dollar

ARTICOLI POPOLARI

USD/IDR inches lower after opening at a bullish gap, remaining in the positive territory for the fourth consecutive day, trading around 18,030 during the Asian hours on Thursday.

USD/IDR loses minor ground as Fed Warsh's surprisingly less hawkish comments reduce the urgency for immediate interest rate hikes.
Soft US economic data further cooled hawkish Fed sentiment, reducing expectations for aggressive future interest rate hikes.
Fitch Ratings warned that prolonged declines in Indonesia's foreign exchange reserves could pressure the country's credit rating.

USD/IDR inches lower after opening at a bullish gap, remaining in the positive territory for the fourth consecutive day, trading around 18,030 during the Asian hours on Thursday. The pair loses minor ground as the US Dollar (USD) stabilizes following a relatively subdued appearance by Federal Reserve (Fed) Chair Kevin Warsh at the ECB Forum on Central Banking on Wednesday.

Warsh opted not to provide explicit guidance regarding the central bank's upcoming July policy decision. While he acknowledged that inflation remains too elevated and reiterated a firm commitment to the Fed's 2% target and institutional independence, his overall tone was perceived as less hawkish than anticipated. Additionally, Warsh noted a personal preference for winding down the central bank's bond portfolio but emphasized that any adjustments to the balance sheet would only occur after extensive public preparation.

The Greenback also faces headwinds on easing risk aversion amid a wave of optimistic geopolitical developments out of the Middle East. Qatari officials reported "positive progress" in the ongoing negotiations between US and Iranian diplomats regarding a memorandum of understanding, noting that both sides have agreed to continue their dialogue. Reinforcing this positive sentiment, US Vice President JD Vance stated that the discussions in Doha are going well and indicated that formal talks regarding the nuclear issue are expected to commence in the near future.

Moreover, a batch of soft US economic data further cooled the hawkish sentiment surrounding the Fed outlook. June’s ADP Employment Change report showed that private payrolls grew by just 98K, missing Wall Street's 113K forecast and slowing from May's 122K increase. Additionally, the manufacturing sector showed signs of cooling as the ISM Manufacturing PMI edged lower to 53.3, missing the 54.0 consensus estimate. Together, this cooling data and diplomatic progress have investors shifting their full attention to the upcoming Nonfarm Payrolls (NFP) report for fresh insights into the labor market and the Fed’s policy path.

Fresh data indicated Indonesia’s Trade Balance unexpectedly swung to a $1.61 billion deficit in May, marking its first gap since April 2020 as exports dropped 5.73% while imports surged 22.16%. Meanwhile, annual inflation hit a three-month high of 3.34% in June, driven by elevated food prices. Amid these headwinds, Fitch Ratings warned that a prolonged decline in foreign exchange reserves could pressure the nation's credit rating.

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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