Rupiah Gains as S&P Affirms Indonesia Investment Grade

Key Moments

Rupiah Gains After S&P Rating Confirmation

USD/IDR extends its pullback for a second consecutive session, hovering near 18,110 during Wednesday’s Asian trading. The pair weakens as the Indonesian rupiah benefits from S&P Global Ratings’ decision to reaffirm Indonesia’s investment-grade sovereign credit rating and maintain a stable outlook.

S&P highlighted that recent fiscal and external headwinds, which have been influenced by higher oil prices and currency depreciation, are viewed as temporary. The rupiah is also receiving additional backing from Bank Indonesia, which has delivered a cumulative 100-basis-point rate increase between May and June and has committed to deploying all available monetary instruments to help steady the currency.

US Dollar Softens on Cooler Inflation Data

The pressure on USD/IDR is compounded by weakness in the US dollar, which is holding recent losses after softer-than-expected US inflation figures prompted speculation that the Federal Reserve could move toward a less hawkish stance.

US Consumer Price Index (CPI) inflation slowed to 3.5% year-over-year in June, down from a three-year high of 4.2% in May and below the 3.8% market forecast. On a month-over-month basis, headline CPI fell by 0.4% in June, reversing a 0.5% increase recorded in May.

Geopolitical Tensions and Fed Expectations Support the Greenback

Despite the weaker inflation backdrop, downside in the US dollar may be limited as safe-haven demand picks up following renewed frictions between the United States and Iran. Heightened tensions around the Strait of Hormuz are pushing oil prices higher, stoking concerns about inflation persistence and the potential for interest rates to remain elevated for longer.

According to the CME FedWatch Tool, market participants are currently assigning roughly a 50% probability to a Federal Reserve rate hike in September.

The US Central Command (CENTCOM) confirmed that it carried out an additional round of military strikes on Iranian targets. The operation focused on dozens of military facilities along Iran’s coastline and near the Strait of Hormuz, a critical maritime corridor that handles nearly 20% of global energy flows. The coordinated campaign employed US fighter aircraft, drones, and naval assets to deliver precision strikes against Iranian missile and drone infrastructure.

Understanding Risk Sentiment in Markets

In financial markets, the expressions “risk-on” and “risk-off” describe how willing investors are to take on risk during a given period. In a “risk-on” environment, investors are more confident about the outlook and gravitate toward riskier assets. In a “risk-off” environment, investors become more cautious and favor safer instruments that offer more certain, albeit sometimes lower, returns.

Assets That Reflect Risk Appetite

During “risk-on” phases, equity markets typically advance, and most commodities, excluding Gold, tend to gain as they benefit from expectations of stronger growth. Currencies of commodity-exporting countries often appreciate on the back of higher demand for raw materials, and cryptocurrencies can also rise under these conditions.

In a “risk-off” setting, bonds – especially major government bonds – generally rally, Gold tends to outperform, and traditional safe-haven currencies such as the Japanese yen, Swiss franc, and US dollar typically strengthen.

Currencies Sensitive to Risk-On vs. Risk-Off

The Australian dollar (AUD), Canadian dollar (CAD), New Zealand dollar (NZD), and some smaller currencies such as the Russian ruble (RUB) and South African rand (ZAR) often gain in “risk-on” markets. These economies are heavily linked to commodity exports, and commodity prices usually advance when investors foresee stronger future demand driven by increased economic activity.

In contrast, the US dollar (USD), Japanese yen (JPY), and Swiss franc (CHF) tend to appreciate when markets shift into “risk-off” mode. The US dollar benefits from its role as the world’s reserve currency and from flows into US government debt, which is perceived as secure. Demand for the yen is supported by Japanese government bonds, a large share of which is held domestically, reducing the likelihood of widespread selling during crises. The Swiss franc is underpinned by stringent Swiss banking regulations that are seen as providing robust capital protection.