Indonesian Rupiah gains as Q2 foreign direct investment increases

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USD/IDR continues its losing streak for the fourth successive day, trading around 17,990 during the Asian hours on Friday.

USD/IDR remains subdued as a 27.4% surge in Q2 foreign investment strengthens the Indonesian Rupiah.
Softer US inflation and falling producer prices have led markets to rule out a near-term Fed rate hike.
The US dollar gains support as geopolitical tensions and conflicts escalate in the Middle East.

USD/IDR continues its losing streak for the fourth successive day, trading around 17,990 during the Asian hours on Friday. The pair remains under pressure as the Indonesian Rupiah (IDR) strengthens, boosted by resilient investor confidence following a 27.4% year-over-year surge in Q2 foreign direct investment.

Meanwhile, the government is taking proactive steps to stabilize food prices against El Niño-driven supply risks, following June headline inflation figures that climbed toward the upper bound of Bank Indonesia's target range.

The downside of the USD/IDR pair could be restrained as the US Dollar (USD) receives support from escalating developments surrounding conflicts in the Middle East. Reuters reported on Thursday that Iran has instructed Yemen’s Houthi militia to stand ready to close the critical Red Sea oil route if the United States strikes Iranian power infrastructure, presenting a potent new threat to global energy supplies. Amplifying these concerns, the Tasnim news agency reported explosions in Bandar Abbas, Qeshm, and Ahvaz, while very loud explosions were also heard in Kuwait and as far away as Basra.

However, the Greenback could face challenges as softer-than-expected US inflation prompted traders to scale back expectations of near-term Federal Reserve rate hikes. Economic data released earlier this week showed US consumer inflation increased less than expected in June, while producer prices unexpectedly fell. Meanwhile, initial jobless claims dropped to a two-month lows. Markets have now largely ruled out a Fed rate hike this month, though expectations remain split over the possibility of a move in September.

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.