Shifting safe-haven demand lifts Indonesian Rupiah against US Dollar

• USD/IDR advances despite a softer US Dollar as doubts build over the sustainability of the AI trade.
• Downside in USD/IDR remains constrained by elevated oil prices, El Niño-driven food inflation and concerns over the market classification dispute.
• 2.1 trillion rupiah in fines were imposed by OJK after MSCI warned of a downgrade over concerns about coordinated stock trading.

USD/IDR trades near 18,110 in Friday’s Asian session. Following two days of gains, the pair edges lower as the US Dollar (USD) comes under pressure from growing questions over the sustainability of the AI trade. Quarterly US earnings from several megacap technology companies fell short of expectations, undermining investor confidence.

Broader risk aversion has also increased as conflict in the Middle East escalates. Safe-haven demand has strengthened on reports that the US and Israel are preparing further military strikes against Iran after the upcoming midterm elections. Both the Japanese Yen and Swiss Franc have consequently gained support against the Greenback.

There is little indication from Federal Reserve (Fed) officials of any urgency to quicken the pace of policy tightening. While Fed Chair Kevin Warsh recently voiced optimism about the US economy’s underlying strength, he gave no signal on whether further interest rate increases would be necessary. Against that measured guidance, participants using the CME FedWatch Tool currently assign a 92.8% probability to rates remaining unchanged at the upcoming 27–28 October policy meeting.

Multiple domestic pressures on the Indonesian Rupiah (IDR) could limit further declines in USD/IDR. Fiscal concerns have intensified with the rise in global oil prices. At the same time, a sharper increase in food prices associated with El Niño continues to underpin inflationary pressures. Sentiment deteriorated further after President Prabowo Subianto sharply criticised MSCI’s proposed changes to Indonesia’s market classification, fuelling concerns about potential foreign capital outflows.

Penalties totalling 2.1 trillion rupiah ($116.67 million) were imposed late on Wednesday by Indonesia’s financial regulator, the OJK. Responding to regulatory concerns, it delivered sanction letters to parties found guilty of trading-rule violations involving three listed companies. OJK described the penalties as a central element of wider capital market reforms. The action followed warnings from MSCI that Indonesian equities could be downgraded from "emerging" to "standalone" market status unless sufficient steps were taken to tackle coordinated stock trading practices.

Rupiah stabilisation: BI favours targeted support over rate increases

Recent foreign exchange operations by Bank Indonesia have been pivotal to its policy stance, according to DBS Group Research’s Philip Wee. DBS states that “together with continued intervention in spot and forward FX markets, these measures underscored BI’s preference for targeted currency stabilisation over outright monetary tightening from MSCI-led market volatility.” In their assessment, BI has deliberately opted for FX operations and targeted instruments, rather than an immediate increase in policy rates, to address index-related market pressures.