Asian currencies have broadly weakened versus the US dollar since the 18 June FOMC meeting as the greenback and US Treasury yields remain firm, while markets are fully pricing another Fed hike by October. The report frames the next moves in Asia FX as more country-specific, with domestic fundamentals and central bank actions shaping diverging outcomes even as external pressure persists.
In Indonesia, rupiah volatility has eased after Bank Indonesia stepped up support via policy rate hikes and higher SRBI yields, though the currency remains sensitive to higher US yields. The domestic backdrop has softened: manufacturing contracted in June, exports fell 5.8% year on year, and May posted the largest trade deficit since April 2019, while inflation rose to 3.3% year on year, near the top of BI’s 2.5%±1% target band. In Malaysia, BNM repatriation efforts have helped limit disorderly ringgit moves, with the 11 July state election a near-term focus. Thailand saw inflation ease to 2.4% year on year in June alongside deteriorating non-performing loan ratios, and the BOT is expected to hold at 1.0%, weighing on the baht’s carry. The Philippine peso faces slowing growth, inflation above 6%, and subdued inflows, while further BSP tightening may help.
Outlook for Asian Currencies Amid Fed Tightening
Given the firm US dollar, we see persistent pressure on Asian currencies in the coming weeks. Markets are now pricing in an almost certain Federal Reserve rate hike by the end of July, following the latest US inflation report showing core CPI at 3.8%. This environment, with the US 10-year Treasury yield holding firm around 4.50%, creates a difficult backdrop for the region.
Country-Specific Strategies and Risks
In Indonesia, we see a tug-of-war influencing the rupiah. Bank Indonesia’s recent rate hike to 6.75% has successfully calmed volatility, but the currency’s fate remains tied to US yields. We recommend using options, such as buying US dollar calls against the rupiah, to position for potential weakness without paying the high cost of carry from shorting the currency directly.
The Malaysian ringgit faces immediate political risk which should drive volatility higher. With the state election now just days away on July 11, we are pricing in a modest risk premium as polls suggest a tight race. We believe a straddle strategy on the USD/MYR pair is prudent, as it will profit from a significant price move in either direction once the election results are clear.
We continue to hold a bearish view on the Thai baht due to its unattractive yield. The Bank of Thailand is unable to raise rates to match the Fed because of persistent economic weakness, highlighted by a household debt-to-GDP ratio that remains above 90%. We suggest entering long USD/THB forward contracts to capitalize on the widening interest rate differential.
The Philippine peso, however, may show relative strength compared to its neighbors. With inflation remaining sticky at 5.5%, the central bank is likely to continue its tightening cycle, providing support for the currency. A pair trade, going long the Philippine peso against the Thai baht (long PHP/THB), looks attractive to play this monetary policy divergence.
