Indonesian Rupiah gains as Fed uncertainty weighs on US Dollar
- USD/IDR declines as the US Dollar slips ahead of the Fed's rate decision.
- Perry Warjiyo's surprise resignation as Bank Indonesia Governor raises central bank independence concerns and weighs on Indonesian assets.
- Indonesian President Prabowo's approval rating drops to 51.1% as public pessimism over economic and political conditions grows.
USD/IDR depreciates after two days of gains, trading around 18,120 during the Asian hours on Wednesday. However, the pair has lost ground as the US Dollar (USD) struggles ahead of the Federal Reserve’s (Fed) upcoming policy decision.
While the Fed is widely expected to leave interest rates unchanged, traders are currently pricing in an unusually high 30.5% chance of an immediate rate hike, signaling notable uncertainty ahead of the announcement. Looking further ahead, markets are factoring in a 76.6% probability of a rate increase in September, reinforcing expectations that global borrowing costs will remain elevated for longer.
However, any further downside for the USD/IDR pair could be restrained as the Indonesian Rupiah (IDR) faces severe headwinds of its own following the surprise resignation of Bank Indonesia (BI) Governor Perry Warjiyo on Monday. His unexpected departure weighed heavily on Indonesian assets as analysts and investors raised fresh concerns over the central bank’s institutional independence.
Compounding these economic concerns, a new survey conducted this month by Saiful Mujani Research and Consulting (SMRC) revealed that President Prabowo Subianto’s approval rating has fallen to barely 50%. This marks a sharp drop from the strong public support he enjoyed during his first year in office. Specifically, the survey found that 51.1% of respondents approved of the President’s performance, extending a steep downward trend from 81.2% in November of last year and 66.4% in March.
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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