Asia FX: Oil shock risks as US–Iran talks progress – MUFG

MUFG’s Senior Currency Analyst Lloyd Chan highlights that an escalation in US–Iran tensions could trigger an Oil price shock, reviving global inflation and hurting Asia’s net Oil importers. He notes that during the Russia–Ukraine war, KRW, INR, PHP, and THB underperformed, while MYR and CNY fared better. Overall, Asian FX should benefit from further US rate cuts unless Oil risks materialize.

Oil shock threat to Asian currencies

"A breakdown in diplomacy that escalates into a prolonged Middle East conflict would raise the risk of an oil price shock, reigniting global inflation pressures and worsening the terms of trade for Asia’s net oil importers."

"From an Asian FX perspective, history suggests that an oil price shock would likely trigger broad regional weakness, but with notable differentiation."

"During the first two weeks of the Russia–Ukraine war in 2022, currencies such as KRW, INR, PHP, and THB underperformed, reflecting their sensitivity to higher energy import costs and risk-off flows."

"In contrast, MYR outperformed on the back of rising oil prices, while CNY remained relatively resilient."

"As a result, further US rate cuts would help narrow interest rate differentials, which should broadly support Asian FX, absent an adverse oil price shock."

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