Indonesian Rupiah receives support from foreign capital inflows

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USD/IDR falls as the Indonesian Rupiah gains on news that MSCI deferred delaying Indonesia's downgrade to frontier status until November.
The Rupiah gained as Bank Indonesia reported IDR 105 trillion in foreign inflows into bonds so far this June.
The US Dollar pulled back after reaching a 13-month high of 101.80 on Wednesday.

USD/IDR loses ground after three days of gains, trading around 17,970 during the Asian hours on Thursday. The pair depreciates as the Indonesian Rupiah (IDR) gains ground on improved domestic market sentiment. This optimism follows global index provider MSCI's decision to defer a potential downgrade of Indonesia's equity market to frontier status until November, allowing the country to retain its emerging market designation for the time being.

The Rupiah has been further bolstered by Bank Indonesia (BI), which reported strong foreign capital inflows. Funds entering government bonds and the central bank's one-year SRBI bonds have reached approximately IDR 105 trillion so far in June.

Moreover, the US Dollar (USD) is pulling back, contributing to the USD/IDR’s downward movement. The Greenback eased after hitting a 13-month high of 101.80, reached on Wednesday, as safe-haven demand softened amid reports of progress in US-Iran peace negotiations.

However, the US Dollar's downside may be limited as it remains supported by rising expectations for tighter monetary policy. Traders are positioning for Federal Reserve interest rate hikes later this year following hawkish signals from Federal Reserve Chairman Kevin Warsh. He emphasized a firm commitment to taming inflation, noting that the broader US economy remains stable. Reflecting this shift, the CME FedWatch tool indicates that markets are now pricing in an 83.1% probability of rate hikes by the end of December.

Looking ahead, market participants are closely awaiting the release of the US Personal Consumption Expenditures (PCE) data later today. Headline inflation is anticipated to heat up, moving from April's 3.8% to 4.1% year-over-year in May, while core PCE is projected to edge slightly higher to 3.4%. These upcoming figures will be critical in dictating the next directional move for 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.