Asia FX: Oil price shocks and currency risks – MUFG

Impact of Rising Oil Prices on Asian Currencies

Michael Wan, Senior Currency Analyst at MUFG, suggests that if oil prices continue to surge due to ongoing tensions involving Iran, most Asian currencies could come under pressure. This is largely because many economies in the region rely on oil imports.

According to Wan, currencies such as the South Korean won (KRW), Indian rupee (INR), and Philippine peso (PHP) are particularly at risk, given their economies’ dependence on imported oil and, in the case of KRW, its higher sensitivity to market changes. In contrast, the Chinese yuan (CNH) and Malaysian ringgit (MYR) are expected to hold up better compared to their regional peers.

From an inflation standpoint, Wan’s research indicates that consumer price inflation across Asia could rise by approximately 0.1 to 0.9 percentage points, with Thailand, Vietnam, the Philippines, and South Korea being the most affected by higher oil costs.

Wan does not anticipate that central banks in Asia will raise interest rates solely in response to these risks. However, he notes that potential rate cuts could be postponed in countries like the Philippines and Indonesia, and the likelihood of rate reductions in India and South Korea may decrease further.

He also expects FX forward curves to steepen in several Asian markets, reflecting increased risk premiums. On a global scale, currencies considered safe havens, such as the Japanese yen (JPY), may perform better in the short term, while higher-beta currencies like the Australian dollar (AUD) could lag behind.

(This report was produced with the assistance of artificial intelligence and reviewed by an editor.)