Indonesian Rupiah firms after S&P Global reaffirms stable grade rating
- USD/IDR falls as the Indonesian Rupiah strengthens after S&P reaffirmed the country's stable investment-grade credit rating.
- US Dollar weakens as soft inflation data raise hopes for a less hawkish Fed.
- US June CPI inflation slowed to 3.5% year-over-year from May's 4.2%, comfortably beating the market consensus of 3.8%.
USD/IDR loses ground for the second consecutive day, trading around 18,110 during the Asian hours on Wednesday. The pair depreciates as the Indonesian Rupiah (IDR) strengthens following S&P Global Ratings' reaffirmation of Indonesia’s investment-grade credit rating with a stable outlook.
S&P noted that recent fiscal and external pressures, triggered by elevated oil prices and rupiah depreciation, are likely temporary. The currency also found solid backing from Bank Indonesia, which implemented a 100-basis-point rate hike between May and June and pledged to utilize all available monetary tools to stabilize the rupiah.
The USD/IDR pair struggles as the US Dollar (USD) holds losses following softer-than-expected US inflation data, fueling hopes that the US Federal Reserve (Fed) might adopt a less hawkish monetary stance.
The US Consumer Price Index (CPI) inflation eased to 3.5% year-over-year in June, dropping from a three-year high of 4.2% in May and coming in well below the market consensus of 3.8%. On a monthly basis, headline CPI actually declined by 0.4% in June, a notable shift from the 0.5% increase recorded in May.
However, the downside of the Greenback could be restrained amid rising safe-haven demand following renewed tensions between the United States (US) and Iran. The renewed Hormuz tensions drive up oil prices, fueling inflation concerns and prolonged higher interest rates by the Federal Reserve (Fed). The CME FedWatch Tool indicates that markets are now pricing in a roughly 50% chance of a Federal Reserve rate hike in September.
The US Central Command (CENTCOM) confirmed it executed an additional series of military strikes against Iran. The operation targeted dozens of military sites along the Iranian coast and near the Strait of Hormuz, a vital maritime chokepoint that handles nearly 20% of the world's energy supply. The coordinated assault utilized US fighter jets, drones, and naval vessels to launch precision munitions at Iranian missile and drone installations.
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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