Indonesian Rupiah gains as Fed pause odds hit US Dollar
- Indonesian officials seek urgent clarification from MSCI following threats of market reclassification to standalone status.
- The US Dollar weakened as traders slashed expectations for a Federal Reserve rate hike this month.
- Market expectations for the Fed to keep interest rates steady have surged to nearly 84%.
USD/IDR inches lower after registering modest gains in the previous day, trading around 18,080 during Asian hours on Monday. Indonesian market participants are assessing the situation after Bloomberg reported that local officials plan to meet with MSCI Inc. executives on Monday.
Regulators were reportedly blindsided by the index provider’s threat to reclassify Indonesia as a standalone market, a significantly harsher step than what officials believed was being considered during months of prior negotiations. Following a private briefing on Sunday, sources indicated that representatives from the Financial Services Authority and the Indonesia Stock Exchange will seek clarity on why MSCI introduced potential standalone status and initiated its consultation earlier than the anticipated November review.
Meanwhile, the USD/IDR currency pair continues to hold losses as the US Dollar (USD) faces pressure from declining expectations of an October interest rate hike by the Federal Reserve. Sentiment around the greenback weakened after Fed Chairman Kevin Warsh spoke at an International Monetary Fund event on Friday, stating he does not prejudge monetary policy decisions and leaving markets without a clear direction ahead of the central bank's October 27–28 meeting.
Expectations for a Fed rate increase have dropped sharply as a result. Data from the CME FedWatch Tool reveals that traders are now pricing in an 83.9% chance that the central bank will leave interest rates unchanged later this month, marking a substantial increase from the 49% probability estimated a month ago.
USD index slide deepens as Scotiabank flags limited support ahead
Strategists at Scotiabank highlight the deteriorating technical backdrop for the USD, noting that “the break below 102 is extending,” and warning that they “see little in terms of support ahead of 101.” This reinforces their view that the Dollar index remains vulnerable as it grinds lower toward the next key support area.
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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