Asia FX: Oil shock risks and currency vulnerabilities – MUFG

MUFG’s Senior Currency Analyst Michael Wan argues that sustained Oil price spikes linked to the Iran conflict would pressure most Asian currencies, as regional economies are largely net Oil importers. He highlights KRW, INR and PHP as more vulnerable, while CNH and MYR appear relatively resilient. Wan also notes potential delays to rate cuts and steeper FX forward curves across Asia.

Oil spike fallout for Asian currencies

"For Asia FX, a prolonged and escalating conflict with sustained oil price spikes will weigh on Asian currencies given that most in our region are net oil importers."

"If meaningful oil price increases are sustained, we think the likes of KRW, INR, and to some extent PHP are more vulnerable given their linkages to oil imports and also KRW’s higher beta nature. Meanwhile, CNH and MYR should be relatively more resilient in an Asian context."

"From an inflation perspective, our analysis shows that CPI inflation could rise by around 0.1-0.9pp across Asia, with Thailand, Vietnam, the Philippines, and South Korea the most sensitive to oil price increases."

"Overall, we don’t think Asian central banks will hike rates just because of this risk, but it could delay rate cuts for the likes of the Philippines and Indonesia, and further reduce the probabilities of cuts for markets such as India and South Korea."

"We will likely see some steepening in FX forward curves especially in these markets in Asia reflecting also higher risk premia. From a global perspective, we would expect relative havens such as JPY to outperform in the near-term, while higher beta FX such as AUD to underperform."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)