Indonesian Rupiah declines on increased risk aversion

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USD/IDR gains ground after registering losses in the previous day, trading around 18,180 during the Asian hours on Monday. The US Dollar (USD) appreciated as intensifying geopolitical tensions in the Middle East sparked a wave of safe-haven demand.

USD/IDR rises as the US Dollar receives support from increased safe-haven demand.
US CENTCOM conducted a new round of Sunday airstrikes to degrade Iran's ability to attack commercial shipping channels.
A two-day domestic equity rally across key sectors could limit the Indonesian Rupiah’s downside.

According to Bloomberg, US Central Command (CENTCOM) launched additional airstrikes on Sunday evening aimed at neutralizing Iran's capability to target civilian vessels navigating critical waterways. Reuters further reported that US forces have struck more than 300 Iranian targets over a three-night span, including 140 on Saturday alone. This military escalation has left Washington and Tehran issuing conflicting declarations regarding whether the strategic strait remains open to maritime traffic.

Beyond the direct geopolitical friction, the Greenback receives a secondary boost as the escalating US-Iran missile strikes push oil prices higher, stoking fresh fears of inflation and a prolonged high-interest-rate environment. Investors are now turning their attention to Tuesday's US Consumer Price Index (CPI) data for clearer signals on the Federal Reserve's policy outlook. June's headline CPI is projected to decline by 0.1% month-on-month, while core CPI is expected to rise by 0.3% over the same period.

With traders still anticipating one more interest rate hike before the year concludes, monetary policy remains a critical market driver. Consequently, all eyes will be on Fed Chair Kevin Warsh this Tuesday as he makes his highly anticipated first official appearance before the US Congress.

The Indonesian Rupiah (IDR) may find a floor as domestic equities rallied for a second consecutive day, driven by gains in cyclicals, infrastructure, basic materials, and energy. Market sentiment was lifted by data showing robust investment momentum within strategic sectors of the country's special economic zones, a trend likely to draw global emerging-market capital. Because foreign institutional investors must convert foreign currency into Rupiah to purchase local shares, this capital inflow creates direct localized demand, providing an immediate structural cushion for the IDR.

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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