Central Banks Focus On Growth
Asian central banks are expected to prioritise growth and may avoid raising rates despite inflation pressure. This stance adds to pressure on Asian foreign exchange and equities in the near term. The Korean won (KRW) and Indian rupee (INR) are expected to remain weaker than regional peers. Factors include an energy-driven terms-of-trade shock, a correction in US dollar positioning, accelerating portfolio outflows, and limited appetite for rate rises. The Singapore dollar (SGD) and Chinese yuan (CNY) are expected to perform better. Support is linked to their foreign exchange policies, reserve positions, and bond inflows, alongside a defensive bias towards being long USD. We see Asia facing a severe dual shock from the current energy crisis as Brent crude futures push past $115 per barrel. Regional inventory buffers are rapidly depleting, with OECD commercial petroleum stocks recently reported at their lowest levels since the 2022 energy crunch. This disproportionately exposes economies highly dependent on energy imports through the Straits of Hormuz.FX Winners And Losers
This is creating a sharp growth slowdown alongside rising inflation, with the IMF recently revising its 2026 growth forecast for emerging Asia down from 5.1% to 4.3%. We see risks of recession in energy-intensive economies like South Korea, where last month’s CPI print hit 4.2%, and Thailand. The estimated hit to regional GDP is at least 1.0%. Asian central banks are in a bind and we believe they are unlikely to hike rates aggressively despite this inflation pressure. They will prioritize preventing a sharper economic contraction over taming prices. This policy divergence from the US Federal Reserve is a key driver for our views in the coming weeks. The terms-of-trade shock and accelerating portfolio outflows should point to continued weakness in the Korean won and Indian rupee. We have seen the USD/KRW pair break the 1450 level, a stark contrast to the relative calm we saw in the second half of 2025. Options strategies positioned for further INR weakness, as the USD/INR tests the 85.00 barrier, look attractive. In contrast, the Singapore dollar and Chinese yuan are relative winners due to their managed foreign exchange policies and strong reserve positions. We have noted persistent foreign inflows into Chinese government bonds, providing a floor for the yuan. A defensive long US dollar bias should dominate trading strategies in the near term. Create your live VT Markets account and start trading now.
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