Key Moments
- USD/IDR traded around 18,030 during Asian hours on Thursday, remaining higher for a fourth straight session but paring early gains.
- Softer U.S. data and a less hawkish appearance by Fed Chair Kevin Warsh tempered expectations for aggressive future rate hikes.
- Indonesia’s May trade balance flipped to a $1.61 billion deficit and June inflation reached 3.34%, as Fitch warned on the impact of declining FX reserves.
Fed Tone and Data Cool U.S. Dollar Momentum
USD/IDR slipped slightly after opening with a bullish gap, though the pair stayed in positive territory for the fourth consecutive session and was quoted near 18,030 during Asian trading on Thursday. The move came as the U.S. Dollar stabilized following a comparatively muted appearance by Federal Reserve Chair Kevin Warsh at the ECB Forum on Central Banking on Wednesday.
Warsh refrained from offering clear guidance on the Fed’s July policy decision. He acknowledged that inflation remains too high and reiterated the central bank’s strong commitment to its 2% target and to institutional independence, but market participants interpreted his overall stance as less hawkish than expected. Warsh also expressed a personal inclination to reduce the central bank’s bond holdings, while stressing that any balance sheet changes would follow “extensive public preparation.”
Geopolitics and Risk Sentiment Pressure the Greenback
The U.S. Dollar also faced pressure as risk appetite improved on the back of more constructive geopolitical signals from the Middle East. Qatari officials reported “positive progress” in talks between U.S. and Iranian diplomats over a memorandum of understanding and said both sides had agreed to keep discussions going. Adding to the supportive mood, U.S. Vice President JD Vance commented that discussions in Doha are proceeding well and indicated that formal talks on the nuclear issue are expected to begin in the near term.
Soft U.S. Macro Data Shifts Focus to NFP
A weaker run of U.S. economic releases further dampened hawkish expectations for the Fed. June’s ADP Employment Change showed private payrolls rising by 98K, undershooting the Wall Street forecast of 113K and decelerating from May’s 122K increase. The factory sector also cooled, with the ISM Manufacturing PMI easing to 53.3, below the 54.0 consensus.
The combination of softer labor and manufacturing data, alongside diplomatic progress in the Middle East, has investors looking ahead to the upcoming Nonfarm Payrolls (NFP) report for additional clarity on the labor backdrop and the Fed’s potential policy trajectory.
| U.S. Indicator | Latest Reading | Consensus | Prior |
|---|---|---|---|
| ADP Employment Change (June) | 98K | 113K | 122K |
| ISM Manufacturing PMI | 53.3 | 54.0 | Not stated |
Indonesia Macro Headwinds and Fitch Warning
On the domestic front, recent Indonesian data pointed to growing external and inflation pressures. The country’s trade balance unexpectedly slipped into a $1.61 billion deficit in May, its first shortfall since April 2020, as exports fell 5.73% while imports jumped 22.16%.
At the same time, annual inflation rose to 3.34% in June, a three-month high, largely driven by higher food prices. Against this backdrop, Fitch Ratings cautioned that an extended decline in Indonesia’s foreign exchange reserves could weigh on the sovereign’s credit profile.
| Indonesia Indicator | Latest Reading | Detail |
|---|---|---|
| Trade Balance (May) | -$1.61 billion | First deficit since April 2020 |
| Exports (May) | -5.73% | Year-on-year |
| Imports (May) | 22.16% | Year-on-year |
| Inflation (June, YoY) | 3.34% | Three-month high, food-driven |
Risk Sentiment: Key Concepts and Market Drivers
Understanding “Risk-On” vs “Risk-Off”
In market jargon, “risk-on” and “risk-off” describe how much risk investors are prepared to bear over a given period. During “risk-on” phases, investors are more optimistic about future conditions and more inclined to allocate capital to higher-risk assets. In a “risk-off” environment, concern about the outlook leads investors to favor safer instruments, even if that means accepting lower returns.
Assets That Reflect Risk Sentiment
In a “risk-on” setting, equity markets typically advance and most commodities aside from Gold tend to appreciate, supported by expectations of stronger growth. Currencies of major commodity exporters usually strengthen on rising demand, and cryptocurrencies often benefit as well. In contrast, during “risk-off” periods, bonds – particularly government bonds from major economies – generally rally, Gold tends to gain, and safe-haven currencies such as the Japanese Yen, Swiss Franc, and U.S. Dollar usually see increased demand.
Currencies That Benefit From “Risk-On” Conditions
The Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD), and several smaller currencies including the Ruble (RUB) and South African Rand (ZAR) typically appreciate when markets move into “risk-on” mode. These economies are heavily linked to commodity exports, and raw material prices usually rise when investors anticipate stronger global economic activity.
Currencies Favored in “Risk-Off” Episodes
In “risk-off” environments, the U.S. Dollar (USD), Japanese Yen (JPY), and Swiss Franc (CHF) are the major currencies that tend to strengthen. The U.S. Dollar benefits from its status as the world’s reserve currency and from demand for U.S. government debt, which is widely viewed as secure. The Yen is supported by flows into Japanese government bonds, a large share of which are held domestically and are less likely to be sold aggressively. The Swiss Franc draws support from stringent Swiss banking regulations that are perceived to offer robust capital protection.
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