Indonesian Rupiah gains support on positive GDP outlook, record reserves
- Indonesian Rupiah strengthens as Finance Minister reassures solid second-half growth and foreign reserves hit five-month highs.
- Traders price in a 60%+ chance of a September Fed rate hike, driven by strong August US jobs data.
- Downside losses remain capped by broader US Dollar weakness ahead of upcoming US inflation readings.
USD/IDR depreciates after two days of gains, trading around 17,670 during European hours on Tuesday. The pair loses ground as the Indonesian Rupiah (IDR) is drawing support from positive economic sentiment following reassuring remarks from Finance Minister Purbaya Yudhi Sadewa. The minister expressed confidence that Indonesia's GDP growth will remain solid throughout the third and fourth quarters despite the impact of recent natural disasters, emphasizing that the state budget faces no significant fiscal risks.
Further underpinning the IDR's strength are robust external financial buffers. Indonesia's foreign exchange reserves reached a five-month high in August, providing additional stability and boosting investor confidence in the nation's macroeconomic outlook.
However, the downside of the USD/IDR pair could be restrained as the US Dollar (USD) trades in positive territory after recovering its daily losses. Traders price in a greater than 60% probability of a Federal Reserve rate hike in September, bolstered by a stronger-than-expected August US labor report.
US Nonfarm Payrolls expanded by 162,000 while the Unemployment Rate held steady. Investors are now awaiting the upcoming US Producer Price Index and Consumer Price Index reports later this week to gauge the Fed's next policy move.
Fed hike seen as imminent after strong US jobs data
Strategists at BNY Markets say the latest labour data have reinforced their conviction that further policy tightening is close at hand. They note that, “after an exceptionally strong jobs print on Friday, even Governor Christopher Waller’s somewhat equivocal comments on Thursday don’t seem to be enough to change our view that a rate hike is imminent.”
Risk sentiment FAQs
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.
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.
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.
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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