Asia FX: Cautious Dollar Sentiment Leaves KRW and INR Exposed – TD Securities

Asia Confronts Dual Challenges: Rising Oil Costs and Shrinking Inventories

According to Alex Loo and Jayati Bharadwaj from TD Securities, Asian economies are grappling with two major hurdles: surging oil prices and rapidly diminishing stockpiles. These factors are slowing economic expansion and fueling inflation. As a result, central banks in the region are expected to focus on supporting growth, which may restrict their willingness to raise interest rates.

Asian currencies and stock markets are facing ongoing pressure. The Korean won (KRW) and Indian rupee (INR) are anticipated to remain weak, while the Singapore dollar (SGD) and Chinese yuan (CNY) are likely to perform better. In the short term, a defensive approach favoring the US dollar is expected to prevail.

KRW and INR Expected to Lag Behind Regional Counterparts

Asia is particularly vulnerable to the current energy turmoil, with oil prices climbing and reserves dwindling. The region's heavy reliance on imported energy, especially through the Straits of Hormuz, amplifies its exposure to these shocks.

This situation is projected to cause a notable slowdown in economic growth—potentially reducing GDP by around 1%—and drive inflation higher. Countries with significant energy needs, such as South Korea and Thailand, face increased risks of recession.

Central banks across Asia are caught in a difficult position and are unlikely to raise rates, even as inflation intensifies.

Factors such as the energy-related terms-of-trade shock, adjustments in US dollar positions, accelerating capital outflows, and reluctance among Asian central banks to tighten policy are expected to keep KRW and INR under pressure.

Conversely, the SGD and CNY are poised to outperform, thanks to supportive currency policies, robust reserves, and strong bond inflows.