MUFG: Some Asian Currencies Are Highly Sensitive to Oil Prices
Mitsubishi UFJ Financial Group (MUFG) in its latest report points out that in the current turbulent global energy price environment, currencies of some Asian countries are facing greater risks. Particularly, the Philippine Peso, Korean Won, and Thai Baht are expected to experience more pronounced devaluation pressures with the continuous rise in oil prices.
Their analysis from the Global Market Research Division shows that if international oil prices increase by $10 per barrel, it will exacerbate these economies' import costs, inflation burdens, and current account deficits.
Three Major Impacts on Asian Economies with a $10 Rise in Oil Prices
MUFG's scenario model analysis indicates that each $10 increase in oil prices will correspondingly worsen the current account status of multiple Asian countries, with impacts ranging from 0.2% to 0.9% of GDP. At the same time, inflation pressures will rise, with the CPI expected to climb between 0.1 to 0.8 percentage points.
In countries with high dependency on imported oil, this impact will be more pronounced. For example, the Philippines, South Korea, and Thailand, where high dependency on external energy makes their economies more susceptible to fluctuations in international oil prices.
Trend of Depreciating Asian Currencies, Stronger US Dollar
The currency market has already started to reflect investors' concerns:
- The US Dollar rose by 0.8% against the Philippine Peso, quoted at 57.56 Peso, hitting a new high for the phase.
- The US Dollar rose by 0.6% against the Korean Won, reaching 1,380.73 Won, indicating a rise in foreign capital's risk aversion.
- The US Dollar rose by 0.5% against the Thai Baht, quoted at 32.95 Baht, marking one of the largest single-day increases since May
These figures highlight that the market anticipates rising oil prices could weaken the fundamental support for major Asian currencies.
Inflation and Policy Dilemmas May Trouble Asian Central Banks
As inflation pressures heat up, central banks across Asia may find themselves in a difficult position. On one hand, rising prices will compel central banks to consider rate hikes; on the other hand, weakening currencies and fragile economic recovery restrict their tightening scopes.
Notably, the central banks of the Philippines (BSP) and Thailand (BoT) have maintained unchanged interest rates in the first half of the year. If oil prices continue to rise, this passive approach may shift to defensive rate hikes to curb imported inflation.
The Bank of Korea, meanwhile, has repeatedly expressed concern about the link between international oil prices, the weakening of its currency, and inflation, and may reassess its policy stance in the future.
Oil-Dependent Countries Need to Seek Buffer Mechanisms
Analysts point out that most developing economies in Asia have high dependency on imported energy and face continuous risks of imported inflation. Governments and central banks are advised to prepare, for example:
- Regulating short-term exchange rate fluctuations through foreign exchange reserves
- Temporarily reducing fuel taxes or subsidizing essential energy imports
- Enhancing hedging tools and building strategic energy reserves
MUFG emphasizes that despite the potential for short-term drops in oil prices, if Middle Eastern tensions persist or supply chains are disrupted, Asian currency markets will continue to face intensified volatility challenges in the coming months.
