Indonesian Rupiah weakens as MSCI considers downgrading Indonesia to standalone status
- MSCI considers reclassifying Indonesia from emerging-market status due to persistent market governance and investability concerns.
- Bank Indonesia commits to active market interventions and bond purchases to stabilize the Indonesian Rupiah.
- Fed Chairman Kevin Warsh emphasizes price stability over premature rate decisions.
US Treasury's Erin Browne urged the IMF to address global imbalances and warned that volatile currency moves risk market stability.
USD/IDR holds gains after opening at a bullish gap, trading around 18,090 during Asian hours on Friday. The currency pair strengthened as the Indonesian Rupiah (IDR) came under pressure following an announcement from MSCI. The index provider stated that it is considering downgrading Indonesia from emerging-market status to a standalone market, citing persistent concerns over market investability and governance. This consultation comes after an initial warning issued in June, where MSCI cautioned that Indonesia could face reclassification if accessibility issues were not addressed, according to Reuters.
In response to the potential downgrade, Bank Indonesia reaffirmed its commitment to maintaining an active market presence to safeguard the stability of the Rupiah. The central bank pledged to continue consistent interventions across offshore non-deliverable forwards (NDF), domestic NDF, spot markets, and secondary market government bond purchases. Simultaneously, the Indonesia Stock Exchange announced plans to engage directly with MSCI to address their concerns, stating it will provide stronger evidence of structural market reforms.
The upside of the USD/IDR pair is restricted as the US Dollar (USD) declines following recent comments from key financial leaders. Speaking at a fireside chat with International Monetary Fund (IMF) Managing Director Kristalina Georgieva in Bangkok, US Federal Reserve (Fed) Chairman Kevin Warsh reiterated the Fed’s commitment to price stability while refusing to prejudge upcoming policy meetings. Warsh highlighted that an investment surge is currently the most significant upside force in the global economy.
Meanwhile, US Treasury Undersecretary for International Affairs, Erin Browne, called on the IMF to take a more assertive approach to identifying global imbalances and urged a balanced outlook considering positive US-led economic shocks. She further cautioned that sharp, disorderly currency moves could trigger volatility across broader financial markets.
Fed seen waiting until December as TD trims PCE forecasts on softer PPI
According to TD Securities, the latest inflation signals from producer prices have prompted a modest downward revision to their personal consumption expenditures outlook. The bank notes that "PCE-relevant components of PPI were on net weaker than we had expected, resulting in a lower forecast," and now looks for "core PCE for September to print at 0.32% m/m with the headline at 0.49%." TD stresses that this pace of inflation is "still uncomfortably high for the Fed," but adds that it "believes it prefers to wait until December for another hike."
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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