MUFG’s Lloyd Chan highlights that higher United States (US) 2-year yields and elevated Brent prices are weighing on Indonesian Rupiah (IDR), Philippine Peso (PHP) and Indian Rupee (INR). Chan argues that meaningful relief would likely require a de-escalation in geopolitical risks, especially a US–Iran agreement securing Strait of Hormuz transit, while individual domestic factors leave PHP and INR particularly sensitive to sustained US Dollar (USD) strength and high Oil prices.

Higher yields weigh on Asia FX

"Higher US 2-year yields and still-elevated Brent prices are likely to remain a drag on IDR, PHP, and INR. A meaningful easing in pressure on these currencies would likely require a de-escalation in geopolitical risks, most notably a US–Iran agreement that ensures transit through the Strait of Hormuz."

"For IDR, momentum remains skewed towards further USD/IDR upside, with rising fiscal and current account pressures, alongside weak investor sentiment around government policies, reinforcing rupiah vulnerability. However, there is risk of a reversal with USDIDR already in overbought territory, and particularly if there is a breakthrough in US–Iran negotiations. On valuation, the rupiah appears cheap on a REER basis, while higher-yielding SRBI instruments offer some compensation for the elevated risk premium."

"PHP appears particularly vulnerable, given the sharp rise in inflation and a BSP [Bangko Sentral ng Pilipinas] policy rate of just 4.50% that is insufficient to compensate for the rising risk premium."

"For INR, the recent USD/INR rally could extend towards the 100.00 level should the Iran conflict persist, and oil prices remain above $100/bbl. That said, RBI [Reserve Bank of India] intervention and the possibility of rate hikes could offer intermittent support."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)