Asia FX: Oil rebound pressures INR and THB – MUFG

MUFG’s Lloyd Chan highlights that higher Oil prices and persistent inflation risks are weighing on Asian currencies, with the Indian Rupee (INR) and Thai Baht (THB) underperforming against the US Dollar. The Baht looks particularly vulnerable due to Thailand’s deteriorating external balance and current account deficits, while the softer US Dollar Index (DXY) has not prevented renewed downside pressure on these currencies.

Oil-sensitive Asian FX under pressure

"Across Asia, the Indian rupee (INR) and Thai baht (THB) were the worst-performing currencies last week, each depreciating by around 1% against the US dollar. The weakness was particularly notable given the somewhat softer DXY, underscoring their heightened sensitivity to the rebound in oil prices. For the baht, risks remain skewed to the downside, especially with the deterioration in Thailand’s external balance."

"Inflation risks remain skewed to the upside amid escalating geopolitical tensions in the Middle East. Brent crude prices have rebounded to around USD88/bbl as geopolitical risk premia rise and tanker traffic through the Strait of Hormuz declines. As a result, US gasoline prices remain elevated relative to pre-conflict levels."

"While US Treasury yields have eased following softer June CPI and PPI releases, they remain above 4%. The University of Michigan survey showed that 1-year consumer inflation expectations moderated to 4.2%yoy in July from 4.6% previously, but remain elevated. Longer-term inflation expectations (5-10 years) stayed at 3.3%."