Please download PDF using the link above for the full report
In 2026, we see Asia’s FX and rates markets moving from convergence to divergence, with greater dispersion in macro and market outcomes driven by local factors such as differences in fiscal and monetary policies, domestic growth outlook, macro stability outcomes, coupled with momentum on structural reform policies. Global factors certainly matter as well, and over here we think the outlook is reasonably benign. Fiscal policy in major developed economies is turning more expansionary in 2026 including from Europe, Japan and the US, AI and tech demand should remain robust, while the peak negative impact of tariffs on Asian exports should fade over time, with a low risk of a significant flare-up in trade tensions between the US and China.
We are as such most positive on Asian currencies such as KRW, MYR, and TWD which have exposure to persistent AI themes, domestic structural reform stories, coupled with good macro stability. We are also positive on CNY as revaluation of Chinese assets and structural reforms boost sentiment. Meanwhile, we are most negative on INR, VND and IDR, driven by some deterioration in macro stability such as the current account position, coupled with a lack of clarity on domestic fiscal policy in the latter.
We also think Asia’s rate cut cycle is nearly coming to an end, especially for markets such as India and Vietnam, and to a lesser extent Taiwan and South Korea where growth is above trend and the output gap is nearly closed.
#1: Has supply-chain relocation helped ASEAN and India much and what to expect? The actual manufacturing FDIs have been underwhelming despite optimistic views, with Vietnam standing out with a steady main benefiter. We expect a gradual supply chain shift to continue, likely benefits most Vietnam, Malaysia, and India over the medium term.
#2 Asia will accelerate new patterns of trade. We forecast Asia to increase trade linkages outside the US. Second, we expect China to be an even more important node of trade within Asia. Third, trade corridors between North Asia and Southeast Asia to further intensify. Fourth, cross-regional linkages with Latin America and Mexico to endure.
#3: China’s structural rebalancing in 2026. We expect a 4.9%yoy growth for 2026, recovering from Q4’s cyclical trough, on moderately improved policy efforts in line with long-term structural rebalancing aim. "New Infrastructure" will be an important lever, as government advocates "moderately advanced construction” and gives it a new definition.
#4: Fiscal policy could be a differentiator. Economies with ample debt space may use fiscal levers to fund strategic investments, supporting growth and FX resilience. But India, Philippines, Thailand, and Malaysia lack such flexibility, though Malaysia manages a balance – pursuing consolidation while leveraging state-owned resources for growth.
#5: Asia to accelerate reforms to develop new sources of long-term growth. We are positive on South Korea, China and Malaysia where structural reform momentum is strong and macro stability indicators are not deteriorating. While structural reform momentum is accelerating in Vietnam and India, there is some deterioration in macro stability in both.
#6: Net foreign portfolio flows into Asia should remain broadly constructive, supported by a softer US dollar, lower oil prices, and China’s resilience, though risks from lofty AI valuations and stretched US equities could temper sentiment.
Asia GMR
