MUFG analysts say Asia FX will remain driven by the US-Israel conflict with Iran and related energy disruptions, while macro policy divergence also gains importance. They highlight the modest undervaluation of Asia currencies against the dollar so far, but warn that prolonged war, higher energy prices and rising US CPI could lead to sharp weakness in Asia FX and possible central bank action.
War, energy and data drive Asia FX
“The primary focus of the Asia FX market next week will likely be on developments in the war.”
“The market by now is clearly pricing in a short-term war, a short-term disruption in energy and overall global markets.”
“Any drastically different approach to future developments in the war would mean a more devastating market reaction, including Asia FX.”
“Additionally, with some Asian foreign exchange values at historic lows, further increases in energy prices are likely to cause a shock to the trade balance, prompting some Asian central banks to intervene in foreign exchange markets, including possible “verbal intervention” by Japanese and South Korean authorities to prevent rapid depreciation of the JPY and KRW.”
“Most important is US CPI on March 11, where an upside surprise would strengthen the Fed’s ‘higher for longer’ stance and put pressure on Asian EM capital flows as well as Asian currencies.
(This article was created with the help of an artificial intelligence tool and reviewed by an editor.)
