Currencies could be hit by short-term pressures

ASIAN currencies, including the peso, will likely face near-term but short-lived pressure as the Middle East conflict unfolds, ANZ Research said. “We could see more near-term strength in the USD (US dollar) as geopolitical risks escalate due to a short squeeze as short dollar positioning gets unwound,” it said.

“A stronger USD would see Asian currencies come under pressure, especially the major oil importers.”

The Korean won, Thai baht and Philippine peso have been the worst performing currencies so far following the US attack on Iran, ANZ Research noted.

The peso hit an almost three-month low on Monday, closing at P57.58 against the greenback — the weakest since March 26’s P57.69:$1.

Analysts said that this was due to the surprise US attack on Iran’s nuclear facilities over the weekend, which led to higher global crude oil prices.

While historically there is a positive correlation between oil prices and Asian currencies, ANZ Research said this was only if the rise in oil is driven by stronger global growth. “Since Asia’s growth is primarily driven by exports, better global growth that tends to lift oil prices will also be good for the region’s growth and hence its currencies,” it said. But oil price increases are driven by supply shocks or geopolitical turmoil, as in the case in 2022 and the present situation, the correlation reverses and Asian currencies tend to come under pressure. “Once the current geopolitical storm passes, we can expect Asian currencies to recover,” ANZ Research said.

Consumer price growth in the region is also expected to be affected by geopolitical tensions, with ANZ Research estimating up to a 0.2-percentage-point impact.

It added that this would depend on the weight of vehicle fuels in the consumer price index basket.

Thailand is projected to be affected by the possible 0.2-percentage-point increase in inflation, given the high share vehicle fuels have in its inflation basket.​

“The rise would have been larger were it not for the oil fuel fund lowering its diesel levy to help stabilize prices,” ANZ Research said.

The Philippines, China and Korea, meanwhile, are expected to experience 0.1-percentage-point increase as vehicle fuels in these countries make up a smaller share of their inflation baskets.

“At the other end of the spectrum, any inflation pass-through will be slowest in India, Malaysia and Indonesia, where policymakers keep a tight rein on key retail fuel prices,” ANZ Research said.