The Korean Won (KRW) and Indonesian Rupiah (IDR) are underperforming their regional peers, weighed down by a combination of rising oil prices and a hawkish Federal Reserve, according to analysts at OCBC Bank.
In a research note on Wednesday, OCBC strategists pointed to the specific vulnerabilities of South Korea and Indonesia as net oil importers. The recent rally in crude oil prices, driven by supply constraints and geopolitical tensions, directly increases import costs for these economies, worsening their trade balances and putting downward pressure on their currencies.
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Diverging fortunes in Asian FX
The analysis from OCBC highlights a growing divergence within the Asian foreign exchange environment. While some currencies in the region have found support from a broadly weaker US dollar or positive domestic data, the KRW and IDR are facing unique headwinds.
The strategists noted that the hawkish stance from the US Federal Reserve, signaling higher-for-longer interest rates, further complicates the outlook for these currencies. A higher Fed funds rate strengthens the dollar’s yield advantage, drawing capital away from emerging markets and pressuring currencies like the won and the rupiah.
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“The dual shock of higher oil prices and a hawkish Fed is a particularly difficult combination for oil-importing Asian economies,” the OCBC note stated. “This is reflected in the relative underperformance of the KRW and IDR against their regional counterparts.”
Impact on South Korea and Indonesia
For South Korea, the world’s fifth-largest crude oil importer, rising energy costs threaten to widen its trade deficit and fuel domestic inflation. The Bank of Korea faces a delicate balancing act, needing to support the won without choking off economic growth. The KRW has been one of the worst-performing Asian currencies this year, and OCBC’s analysis suggests the pressure may persist.
Indonesia, while a major exporter of commodities like coal and palm oil, remains a net importer of crude oil. The rising cost of energy imports can erode the benefits from its other commodity exports. Bank Indonesia has been actively intervening in the forex market to stabilize the rupiah, but the OCBC report suggests that fundamental headwinds may limit the effectiveness of such measures.
The broader implications for Asian markets are significant. If oil prices remain elevated and the Fed maintains its hawkish rhetoric, other oil-importing currencies in the region, such as the Indian Rupee and the Philippine Peso, could also come under increased pressure. Investors are likely to remain cautious, favoring currencies of net oil exporters or those with stronger macroeconomic fundamentals.
