MUFG’s Michael Wan notes that Asian currencies should benefit from stronger regional growth differentials versus the US, particularly in AI-related export economies such as South Korea, Taiwan, Malaysia and Singapore. He highlights that Asia FX is being pulled between a stronger Dollar, sticky US yields and evolving Fed policy under Chair Kevin Warsh, alongside shifting oil-driven risk sentiment.

Asia FX tug of war intensifies

"Overall, while oil prices rose on these developments and this weighed on sentiment somewhat, the overall level of oil prices seem to be low enough to support risk sentiment. Beyond the Iran conflict, the key driver of Asia FX and rates markets is also the changing nature of the Fed under new Fed Chair Kevin Warsh, and the spillover from both a stronger Dollar and also sticky US yields. As such, while the previous underperformers such as INR and PHP have been more resilient in the near-term due to lower oil prices, we have seen some underperformance in the low yielders in our region as the drivers shift towards rate differentials."

"Moving forward, our base case for Asian currencies is that they will also receive support from better growth differentials with the US, especially the likes of AI electronic exporting currencies such as South Korea, Taiwan, Malaysia, and Singapore. Our previous framework on the drivers of Asia FX analysing past Fed rate cycles shows that yield differentials is only one factor influencing currencies in our region, with growth differentials and risk sentiment just as importantly if not sometimes more important. Of course, if the Fed does turn materially more hawkish and this also results in declines in risk appetite in markets this will certainly matter for Asia FX."

"But if our base case holds, overall strong growth in Asia, decent improvement in risk sentiment should be able to more than offset what we have seen and expect to see from the Fed moving forward."

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