Ahead Today
G3: US ISM Manufacturing, US ISM Prices paid
Asia: Indonesia CPI, India PMI, India industrial production
Market Highlights
Brent oil prices surged to around US$80/bbl at Asia open while the Dollar strengthened, as markets digested the impact of the US and Israel strikes on Iran and killing of Iran’s top leader Ayatollah Ali Khamenei over the weekend.
For Asia FX, a prolonged and escalating conflict with sustained oil price spikes will weigh on Asian currencies given that most in our region are net oil importers (see link to Asia: impact of oil price shock on Asia FX written in June 2025).
If meaningful oil price increases are sustained, we think the likes of KRW, INR, and to some extent PHP are more vulnerable given their linkages to oil imports and also KRW’s higher beta nature. Meanwhile, CNH and MYR should be relatively more resilient in an Asian context. We don’t think Asian central banks will hike rates just because of this risk, but it could delay rate cuts for the likes of the Philippines and Indonesia, and further reduce the probabilities of cuts for markets such as India and South Korea. For Vietnam, we already have a rate hike in our profile and sustained oil price increases give us more confidence on that view. Overall, we will likely see some steepening in FX forward curves especially in these markets in Asia reflecting also higher risk premia. From a global perspective, we would expect relative havens such as JPY to outperform in the near-term, while higher beta FX such as AUD to underperform.
It is important to emphasise there is still much we do not know about how things may unfold even over the coming days and weeks, and as such our implicit base case for our forecasts for now is that the situation and conflict is eventually resolved and for oil prices to normalise over time.
What we do know right now is that the events between US and Iran over the weekend are meaningfully different relative to the June 2025 12-day conflict between Israel and Iran in a couple of important ways:
- First, this involved the US explicitly to a larger degree, although this was not entirely a surprise given the significant build-up in military assets already seen
- Second, many of the top leadership in Iran were targeted and assassinated, including Ayatollah Ali Khamenei.
- Third, the stated objective of regime change in Iran at least publicly announced by President Trump over the weekend seems far more ambitious, although over here there are perhaps still different shades of grey and interpretations on the eventual goal.
- Fourth, and importantly, the way in which Iran has retaliated has also been far more expansive, hitting regional countries including the UAE, Qatar, and Saudi Arabia. Although official statements suggest that US bases were the key targets, several civilian places including hotels and airports in Dubai were also hit even if only as a result of collateral damage.
Moving forward, key factors to watch for moving forward include:
- 1) The extent of closure and disruption in the Strait of Hormuz, a key chokepoint where more than 20% of global oil trade and production flows. There are unconfirmed and mixed reports that there is some level of disruption in the Strait of Hormuz, some of which may also be driven by spikes in insurance premiums and freight rates, and perhaps some level of caution by vessels.
- 2) How much further Iran responds and retaliates from here, including whether its actions draw in Gulf states and also leads to further escalation by US and Israel. This will also be fundamentally driven by domestic political changes within Iran, of which the situation is still extremely fluid at this point. On a related note, the extent and duration of military action could also determine the magnitude of regional air travel disruption in the Middle East, and the spillover to tourism and business travel.
- 3) Last but not least, how OPEC+ responds from here in terms of oil supply and production, and also other players such as the US and China through perhaps release of strategic reserves. Over the weekend, OPEC+ agreed to a modest increase in production of 206,000 barrels a day in April, but if needed OPEC+ does have some existing spare capacity of around 3m barrels/day which it could tap if needed.
In a scenario of sustained oil price increases, we think the likes of KRW, INR, and to some extent PHP are more vulnerable given their linkages to oil imports and also KRW’s higher beta nature. Meanwhile, CNH and MYR should be relatively more resilient in an Asian context. Our analysis shows that every US$10/bbl oil price increase could decrease the current account position across Asian economies by around 0.2-0.9% of GDP, with Thailand, Singapore, Taiwan, India and the Philippines seeing bigger hits purely from a current account perspective. Meanwhile, Malaysia is the only net oil and gas exporter in our region and so could see a small benefit purely for its trade balance. Net-net, sustained oil price increase implies that India’s current account deficit will likely breach 2% of GDP while the Philippines could see its current account deficit remain large at around 2-3% of GDP despite softer imports and domestic demand.
From an inflation perspective, our analysis shows that CPI inflation could rise by around 0.1-0.9pp across Asia, with Thailand, Vietnam, the Philippines, and South Korea the most sensitive to oil price increases. For some markets such as India, Indonesia and Malaysia, governments and/or state-owned oil companies could take the first hit and bear the burden either implicitly or explicitly at least initially. Overall, oil prices closer to US$90/bbl could imply inflation rises closer to the top end of the central bank’s inflation target for the likes of the Philippines and Vietnam.
From a trade and tourism perspective, we think the likes of India and Thailand are more vulnerable especially if the conflagration broadens to Middle East and travel activity disruption proves prolonged. 3.5% and 3% of tourism arrivals in India and Thailand come from the Middle East, and India typically has much closer trade linkages with Israel and the Middle East relative to other countries.
Overall, we don’t think Asian central banks will hike rates just because of this risk, but it could delay rate cuts for the likes of the Philippines and Indonesia, and further reduce the probabilities of cuts for markets such as India and South Korea. For Vietnam, we already have a rate hike in our profile and sustained oil price increases give us more confidence on that view. We will likely see some steepening in FX forward curves especially in these markets in Asia reflecting also higher risk premia. From a global perspective, we would expect relative havens such as JPY to outperform in the near-term, while higher beta FX such as AUD to underperform
