Ahead Today
G3: US CPI
Asia: Philippines Bank Lending
Market Highlights
The Dollar weakened although more so for G10 currencies rather than Asia, while gold prices surged on the back increasing concerns around the Trump administration’s attack on Fed independence. Nonetheless, Asian currencies might have been negatively impacted by recent increases in oil prices including developments in both Venezuela and Iran.
In particular, President Donal Trump said he is imposing a 25% tariff on goods from countries “doing business” with Iran, posting on social media that the new duty would be “effective immediately’ without providing more details on the scope of these changes. Looking at the data, China stands out as the top trading partner for Iran, both across exports and imports, and also in terms of its position as the top importer of Iranian crude oil taking up around 90% of Iran’s oil exports. Beyond China, the likes of Turkey, United Arab Emirates, and to a smaller extent Russia and India have some trade linkages with Iran. India in particular does some business and trade with Iran in areas such as fertilisers and petrochemicals, but its direct imports of Iran oil has come down substantially since 2018.
More importantly, it is unclear how exactly Trump would impose these 25% tariffs on China in practice without breaking the existing trade truce between the US and China, something we assume Trump would want to avoid if at all possible given China’s continued leverage on rare earths and critical minerals and the planned summit between Trump and Xi in April 2026. The more important transmission mechanism for Asia for now could be the near-term rise in oil prices, with Iran making up 3% of global oil production and Venezuela around 1% as a rough rule of thumb. Overall the global oil market remains hugely oversupplied from a fundamental perspective and hence we are biased to think that oil prices should still move lower over time absent geopolitical shocks, and providing some support for Asia currencies.
Beyond global factors, India reported its CPI inflation numbers, with a lower than expected rise in December CPI to 1.3% (versus consensus expectations of a 1.5%yoy rise), and by our estimates a 0.7%mom rise. Details showed that food prices and in particular the likes of tomatoes rose and contributed to the year-on-year pickup, although of course in absolute terms the growth rate remains contained. While this print may at face value suggest some space for RBI to cut rates through 2026, we think the bigger constraint to lowering rates is FX and the weak capital inflow picture thus far. As such, the overall rate structure in India has actually gone higher despite RBI’s moves to cut rates and inject more INR liquidity into the banking system.
We as such continue to see RBI keeping rates on hold at 5.25% through 2026, with bond yields likely also taking its cue from the broader fiscal outlook and upcoming Budget 2026 to be announced on 1 Feb.
From FX perspective, we are biased to see USD/INR move higher over time given continued uncertainty around India’s tariffs, and we are forecasting USD/INR at 92.00 by 4Q2026 with an assumption of a delay in the trade deal from early 2026 to 2H2026. Today’s news around potential tariffs on Iran’s trade partners further increases the uncertainty for India’s tariffs and is also negative at the margin for INR.
