Indonesian Rupiah faces challenges due to higher oil prices
- IDR struggles as Higher oil prices strain Indonesia's fiscal conditions as a net oil importer.
- July Retail Sales grew 1.1% year-on-year, rebounding from June's contraction.
- US Dollar gains are restrained as the Fed is expected to hold interest rates steady.
USD/IDR gains after two days of losses, trading around 17,570 during the early European hours on Thursday. The pair gains upward momentum as the Indonesian Rupiah (IDR) faces pressure from elevated oil prices, which strain fiscal conditions given Indonesia's status as a net oil importer.
Supporting domestic resilience, July Retail Sales grew by 1.1% year-on-year, rebounding from a 3.0% contraction in June. This recovery was driven primarily by stronger annual sales in food, beverages, tobacco, and other goods, though monthly sales dipped 0.1% due to post-holiday demand normalization.
However, further gains for the USD/IDR pair may be limited by a weaker US Dollar (USD). Following a recent Reuters poll, most economists expect the Federal Reserve to hold interest rates steady through the rest of the year. While recent economic data has remained strong, market participants are closely monitoring upcoming US Producer Price Index and Consumer Price Index reports to gain vital hints on future monetary policy ahead of next week's Fed meeting.
US Treasury buyback plan underwhelms as yields extend climb
Analysts at Deutsche Bank note that the sell-off in US government debt intensified after the latest official announcement, with Treasuries seeing “further declines after the US Treasury Department confirmed they were buying back up to $6bn of longer-dated Treasuries,” a size that “fell short of some estimates.” The bank suggests that the smaller-than-anticipated buyback programme added to upward pressure on yields as investors reassessed the balance of supply and demand in the longer end of the curve.
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.