Indonesian Rupiah weakens as elevated import cost weigh on balance of payments
- The Indonesian Rupiah faces pressure ahead of key domestic forex reserve and retail sales reports this week.
- Heightened Middle East conflict and Bab el-Mandeb strait disruptions are driving safe-haven demand for the US Dollar.
- Fragile trade balances and elevated energy import costs continue to weigh heavily on Indonesia’s external position.
USD/IDR gains ground after posting modest losses in the previous day, trading around 17,950 during the early European hours on Monday. The pair advances as the Indonesian Rupiah (IDR) faces selling pressure amid market caution ahead of key domestic economic releases, including September foreign exchange reserves and August retail sales figures. Indonesia’s external position remains fragile despite posting a trade surplus in August, with elevated import demands and rising energy costs continuing to weigh on its balance of payments amid heightened Middle East uncertainty.
Driving the USD/IDR pair higher is a strengthening US Dollar (USD), buoyed by safe-haven demand as geopolitical conditions in the Middle East deteriorate sharply. Saudi-backed forces in Yemen recently launched a major offensive to reclaim territory from Houthi forces. Tensions escalated further after the Iran-aligned group seized control of the Bab el-Mandeb strait, a critical maritime chokepoint between the Red Sea and the Gulf of Aden that serves as a vital bypass route for regional crude exports avoiding the Strait of Hormuz.
At the same time, shifting expectations surrounding US monetary policy are shaping broader sentiment. Following softer-than-expected US employment figures, the CME FedWatch Tool indicates that financial markets are now pricing in nearly an 82% chance that the Federal Reserve will hold benchmark interest rates steady at its upcoming policy meeting, up from 74% prior to the labor report. This adjustment reflects a growing market consensus that a cooling US job market will prompt policymakers to keep rates at baseline levels.
US payrolls soften but still signal low-hire, low-fire labour dynamics
Analysts at MUFG/BTMU note that the September US nonfarm payrolls report has "weakened the case for an October Fed hike," even as the underlying picture remains one of a "low-hire, low-fire labour market rather than a sharp downturn." They highlight that "nonfarm payrolls increased by 29k, below the 90k consensus and down from a downwardly revised 133k in August," underscoring a clear loss of momentum in job creation. At the same time, the "unemployment rate edged up to 4.2% from 4.1% as labour-force growth outpaced employment gains," pointing to a softer labour backdrop without yet signalling a pronounced deterioration in overall labour-market conditions.
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.