OCBC’s Sim Moh Siong notes that higher Oil prices and a firmer United States (US) policy outlook are pressuring Asia FX, particularly the Korean Won (KRW) and Indonesian Rupiah (IDR). KRW weakness is seen as flow-driven despite supportive macro fundamentals, while Bank Indonesia (BI) has already hiked 50 bp and is expected to tighten by another 50 bp this year, with risks skewed toward more hikes to contain FX pressures.

KRW flows and IDR policy uncertainty

"Higher oil prices and a firmer US policy outlook kept pressure on Asian currencies last week, led by KRW and IDR. KRW weakness triggered renewedverbal intervention, while Bank Indonesia (BI) reportedly stepped up FX operations to support IDR."

"KRW underperformance appears driven by flows rather than fundamentals. Macro conditions remain supportive."

"However, gains in equities have been concentrated in a few AI-linked names, prompting rebalancing and foreign outflows due to concentration limits. This technical drag could cap KRW upside in the near term."

"Despite a 50bp rate hike to 5.25% in May, USDIDR has continued to rise, moving above 18,000 last week. Our economists expect a further 50bp of cumulative tightening this year to contain FX risks, with the balance of risks skewed toward more hikes."

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