Indonesian Rupiah strengthens as Retail Sales expand in August
- Indonesia’s Retail Sales growth accelerated to 1.3% year-over-year in August, hitting a five-month high.
- USD/IDR weakens as Donald Trump signaled productive talks with Iran, reducing safe-haven demand for the US Dollar.
- Expectations for a Fed rate hike this month dropped sharply to 17.7%.
USD/IDR loses ground after two days of gains, trading around 17, 910 during Asian hours on Friday. The Indonesian Rupiah (IDR) remains stronger following the release of domestic Retail Sales data.
Indonesia’s Retail Sales expanded by 1.3% year-over-year in August, accelerating from a 1.1% gain in July and marking a second consecutive month of growth. This represents the fastest pace of annual growth since March, primarily bolstered by ongoing government measures designed to cushion households against persistent cost pressures. On a month-over-month basis, retail sales rose 0.8%, recovering from July's 0.1% contraction and achieving their strongest gain in five months.
The USD/IDR pair depreciates as the US Dollar (USD) loses its safe-haven demand. The shift followed social media statements from US President Donald Trump, who announced that the US was engaged in "productive discussions" with Iran and would refrain from military strikes before the midterm elections. However, while noting that record volumes of crude oil were passing through the Strait of Hormuz, President Trump emphasized that the US naval blockade of Iranian ports would remain fully operational.
Shifted geopolitical expectations also impacted monetary policy forecasts. According to the CME FedWatch tool, markets are now pricing in nearly a 17.7% chance that the US Federal Reserve will raise interest rates by at least 25 basis points at its upcoming policy meeting later this month—a notable decline from 38% a week ago. Meanwhile, expectations for a rate hike at the Fed's December meeting remain strong, with markets pricing in an 83% probability.
Fed expectations tilt dovish after Waller comments on rate path
Deutsche Bank highlights that Fed pricing “shifted a bit dovishly” after remarks from Fed Governor Waller, who indicated that further rate hikes “do not need to come at consecutive meetings.” The bank notes that this nuance in Waller’s guidance has encouraged investors to reassess the pace of any additional tightening, reinforcing a more measured trajectory for the Fed’s policy path.
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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