Indonesian Rupiah weakens as Fed hike bets lift US Dollar

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USD/IDR advances as the US Dollar strengthens on expectations of further Fed rate hikes this year.
The CME FedWatch tool indicates that markets price a 77.3% chance of year-end Fed rate hikes.
Indonesia's upcoming June forex reserves report follows a five-month decline to a two-year low caused by aggressive rupiah defense.

USD/IDR rises for the second successive day, trading around 18,040 during the Asian hours on Monday. The pair appreciates as the US Dollar receives support from prevailing market expectations of Federal Reserve (Fed) interest rate hikes later this year. The CME FedWatch tool shows financial markets are pricing in a 77.3% chance of Federal Reserve (Fed) interest rate hikes by year-end.

Traders will likely observe the US Institute for Supply Management’s (ISM) Services Purchasing Managers’ Index (PMI) due later in the day. Traders will shift their focus toward Wednesday's release of the Fed’s June policy Meeting Minutes to gain clearer insights into the future path of interest rates.

However, the US Dollar may face headwinds after last week’s dismal labor data prompted markets to scale back expectations for a September rate hike. US Nonfarm Payrolls (NFP) grew by a meager 57,000 last month, severely undershooting the forecasted 110,000. Although the headline unemployment rate ticked down unexpectedly to 4.2% (from May’s 4.3%), the sharp deceleration in hiring underscores a broader economic cooldown.

Meanwhile, attention shifts to Indonesia’s June foreign exchange reserves release due on Wednesday. In May, reserves hit a near two-year low after falling for a fifth consecutive month due to heavy central bank intervention to defend the rupiah. The continuous drawdown has raised red flags, with Fitch Ratings recently warning of potential risks to the country's credit profile.

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.