Sentiment in Asia-Pacific remains fragile as geopolitical risks and higher crude oil prices raise FX and equity volatility. Persistent foreign capital outflows are adding pressure to regional currencies and worsening equity market swings.
March saw record foreign net selling in South Korea, Taiwan, and India. Several regional currencies have weakened as intervention activity rises.
The Reserve Bank of India has tightened FX rules to limit Indian Rupee (INR) falls. Measures include caps on banks’ FX Net Open Positions and limits on onshore dealers offering INR non-deliverable forward (NDF) contracts.
Indonesian Rupiah (IDR), Philippine Peso (PHP) and South Korean Won (KRW) are described as the most exposed, with currencies trading near all-time lows versus the US dollar. Ongoing outflows are linked to continued volatility.
Positioning data show rising hedging demand. iFlow holdings indicate IDR and INR have moved from overheld to underheld, while Taiwan Dollar (TWD) remains deeply underheld.
Underheld positions and outflows point to uneven performance, with currencies potentially lagging during risk-on periods. Terms-of-trade pressures remain a drag on parts of the region.
Given the fragile sentiment in Asian markets, we should prepare for continued pressure on regional currencies. Brent crude holding stubbornly above $90 a barrel is tightening financial conditions and hurting the terms of trade for major oil importers. This external stress, combined with geopolitical uncertainty, makes defensive positioning a priority.
Central bank intervention is becoming a major factor, creating unpredictable price swings. The Reserve Bank of India, for instance, has been actively selling dollars, with its foreign exchange reserves recently falling by over $5 billion in a single week to defend the rupee. These actions increase short-term volatility, making it costly to hold unhedged short positions but rewarding for those positioned for sharp, sudden movements.
The Indonesian Rupiah, South Korean Won, and Philippine Peso are especially at risk, with the USD/IDR pair recently breaking above 16,200 for the first time in four years. The South Korean Won has also weakened past 1,370 per dollar, a level that has previously prompted verbal warnings from its finance ministry. This weakness confirms these currencies are on the front line of current market pressures.
For derivative traders, this environment suggests that implied volatility in these currency pairs will likely remain elevated. Buying options can be more prudent than holding outright spot positions, as they provide defined risk against sudden policy-driven reversals. We should consider purchasing US dollar calls against a basket of the IDR, PHP, and KRW to position for further depreciation.
Positioning data confirms these currencies have moved from overheld to significantly underheld, suggesting that foreign investors are still exiting. This lack of ownership means these currencies may fail to rally strongly even if broader market sentiment improves. Therefore, selling into any strength could be a viable strategy over the coming weeks.
We saw this pattern last year, when March 2025 saw record foreign net selling in key markets like South Korea and India. The fact that capital outflows are persisting a year later indicates a deep-seated structural vulnerability. This historical precedent reinforces our view that further weakness is more likely than a sustained recovery.
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