Asia FX: Lower US yields offset Oil risk – MUFG

MUFG’s Lloyd Chan notes that the Korean Won (KRW) and Taiwan Dollar (TWD) are leading Asia FX gains as softer US yields and a resilient technology cycle support sentiment. In Indonesia, recent Indonesian Rupiah (IDR) stabilization may allow Bank Indonesia (BI) to keep rates at 5.75%, though a weaker trade balance and tight US Dollar (USD) liquidity warrant caution.

Tech-linked currencies outperform peers

"August price action thus far suggests that markets are becoming increasingly selective in their Asia FX outlook. The strongest gains were concentrated in KRW and TWD, pointing to investor preference for currencies leveraged to a softer US rates environment and a resilient global technology cycle."

"Meanwhile, several ASEAN currencies have strengthened month to date despite Brent crude prices staying around $90/bbl, suggesting that lower front-end US yields are partly supportive of regional FX gains."

"That said, any renewed surge in Brent prices would likely pose headwinds for the baht and peso – both of which are experiencing an economic slowdown."

"In Indonesia, the recent rupiah stabilisation, partly helped by BI policy measures, is likely to give room for BI to keep the policy rate unchanged at 5.75% today."

"But Indonesia’s weakened trade balance and still tight dollar liquidity conditions warrant caution on the rupiah’s outlook."