Rupiah Weakens Ahead of Key Retail Data

Key Moments

USD/IDR traded around 18,140 in Asian hours on Thursday, extending gains for a second straight session.
Indonesia’s May Retail Sales YoY are expected to contract by 3.9%, weighing on the Rupiah.
FOMC minutes showed policymakers divided between keeping the benchmark rate at 3.6% and raising it, while markets now see over a 30% chance of a hike at the next Fed meeting.

Rupiah Under Pressure as USD/IDR Extends Advance

The Indonesian Rupiah (IDR) remained on the back foot on Thursday, with USD/IDR rising for a second consecutive session and trading near 18,140 during Asian hours. The currency stayed weak ahead of the release of Indonesia’s May Retail Sales figures, where year-on-year sales are anticipated to fall by 3.9%. Market participants are also looking to US weekly Initial Jobless Claims, scheduled for release later in the North American session, for additional direction.

Fed Minutes Weigh on Dollar, Cap Upside in USD/IDR

Despite the pair’s recent gains, further upside in USD/IDR could be limited as the US Dollar (USD) faced headwinds following the publication of Wednesday’s Federal Reserve (Fed) Meeting Minutes. The minutes highlighted a committee still sharply divided over the outlook for inflation, particularly on whether price pressures will remain persistent or start to ease as geopolitical tensions in the Middle East subside.

Policy Split at Kevin Warsh’s First FOMC Meeting

The minutes from Kevin Warsh’s first meeting as FOMC Chairman, held on June 16-17, illustrated a clear split among policymakers. Many participants indicated that the benchmark interest rate would likely end the year unchanged or slightly below its current 3.6% level. In contrast, another group argued that interest rates would need to move higher by year-end.

Policy View	Benchmark Rate Reference	Timing
Rate unchanged or slightly lower	3.6%	By year-end
Rates need to rise	Above 3.6%	By year-end

Geopolitical Tensions and Market-Based Rate Expectations

Fresh strains in US-Iran relations have intensified concerns about energy-driven inflation, potentially supporting safe-haven demand for the Greenback. This geopolitical backdrop has reinforced market expectations that the Fed may maintain elevated interest rates for an extended period to tackle persistent price pressures.

According to the CME FedWatch tool, swap markets have increased the implied probability of a rate hike at the next Fed meeting to over 30%, up sharply from less than 20% just one week earlier.

Understanding Risk Sentiment and Asset Performance

In financial markets, the terms “risk-on” and “risk-off” describe investors’ appetite for risk over a given period. In a “risk-on” environment, market participants are more optimistic about the economic outlook and more willing to hold higher-risk assets. In a “risk-off” phase, investors become more cautious about the future and gravitate toward assets perceived as safer, even if they offer relatively modest returns.

Assets and Currencies in Risk-On vs Risk-Off Conditions

During “risk-on” periods, stock markets typically advance, and most commodities – except Gold – tend to appreciate, supported by expectations of stronger growth. Currencies of major commodity-exporting countries generally benefit from higher demand for raw materials, and cryptocurrencies also tend to rise.

When sentiment shifts to “risk-off”, government bonds – particularly major sovereign issues – often gain, Gold typically outperforms, and traditional safe-haven currencies such as the Japanese Yen, Swiss Franc, and US Dollar tend to strengthen.

Market Regime	Benefiting Assets	Typical Currency Moves
Risk-on	Equities, most commodities (excluding Gold), cryptocurrencies	Commodity-linked FX such as AUD, CAD, NZD, RUB, ZAR tend to rise
Risk-off	Government bonds, Gold	USD, JPY, CHF tend to strengthen

Risk-On Currencies

In “risk-on” markets, the Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD), and smaller currencies such as the Ruble (RUB) and South African Rand (ZAR) generally appreciate. These economies are heavily tied to commodity exports, and commodity prices tend to rise when investors anticipate increased future demand for raw materials due to stronger economic activity.

Risk-Off Currencies

In “risk-off” conditions, the US Dollar (USD), Japanese Yen (JPY), and Swiss Franc (CHF) are the primary beneficiaries. The US Dollar gains from its role as the world’s reserve currency and from demand for US government debt, which investors view as relatively safe. The Yen benefits from demand for Japanese government bonds, a large share of which is held domestically, reducing the likelihood of broad selling even during crises. The Swiss Franc is supported by strict Swiss banking regulations, which provide investors with heightened capital protection.