Asia FX Weekly - Mideast tensions and nonfarm payroll take centre stage

Week Ahead FX outlook:

Market sentiment has quickly turned sour on Asian currencies amid rising geopolitical tensions in the Middle East. THB (-3%), IDR (-2.7%), MYR (-1.1%), led losses in the region so far this week, partly on the back of a recent rally that’s looking stretched, especially for the MYR and THB. With no signs of a step-down in tensions between the two, geopolitical tensions in the Middle East will likely continue to dominate market sentiment. The key risk is that miscalculations by either parties could lead to a broader reginal conflict, increasing global risk aversion. In particular, a major retaliatory strike by Israel on Iran’s oil exporting facilities would severely disrupt global oil supplies, pushing up oil prices sharply. The key implication on Asian economies would come from a spike in oil prices, like what we saw during the Ukraine-Russia conflict. Except Malaysia, which is a net oil exporter, an oil price shock would hurt many Asian economies, given their high reliance on oil imports. Economies with limited domestic production of crude oil, and thus have a high reliance on oil imports for their energy needs, will be disproportionally vulnerable. These economies include Singapore, Japan, South Korea, Taiwan, Philippines, and India.

A key macro data highlight for the US today will be the nonfarm payroll and unemployment rate data. A weaker than expected nonfarm payroll report could elicit a faster pace of interest rate cuts, while a stronger than expected labour market could allow for a return to the conventional 25bps rate cut in November FOMC meeting. And in the week ahead, markets will focus on US CPI and PPI data, which are likely to show disinflation continuing. Meanwhile, in Asia, key market focus will be on the RBI and BoK policy rate decisions. We look for the BoK to cut the policy rate by 25bps, given headline inflation has returned to its 2% target, while domestic demand has been soft. But we still look for the RBI to stand pat, though there is a risk of a policy rate cut given moderating inflation and an unexpected Q2 growth slowdown.

Who's more susceptible to an oil price shock in Asia?