Asia FX: Searching for outperformers

Asian currencies have continued to strengthen over the past month, with developed market currencies – namely the South Korean won, Japanese yen, and Singapore dollar – outperforming their emerging market counterparts. In contrast, the Indian rupee and Philippine peso were notable outliers, ending the period slightly weaker.

What’s driving this? For the stronger currencies, especially those holding large amounts of US assets, we think capital flows, repatriation, and valuation effects played a big role. On the other hand, the weaker performance in some developing currencies seems more tied to local factors, including central banks building up their reserves.

Looking ahead, we anticipate more divergent performance across Asian currencies, shaped by a combination of structural and cyclical factors. Key drivers will include:

• The degree of real exchange rate over- or undervaluation, which could influence currency adjustments.
• The impact of higher oil prices on current account balances, particularly for net importers.
• Progress or setbacks in trade negotiations, which could shift investor sentiment and trade flows.
• The scale and direction of foreign capital inflows, especially into equity and bond markets.

We expect the Taiwanese dollar and South Korean won to outperform their regional peers, supported by 1) real effective exchange rates (REER) undervaluation, suggesting room for appreciation, 2) large and sustainable current account surpluses, providing external stability, 3) positive growth narratives that continue to attract foreign capital, 4) further scope for hedging US dollar exposure, amplifying demand for local currencies.

While South Asian currencies like the SGD and INR have solid fundamentals, their upside is likely to be limited. For the SGD, REER overvaluation may act as a cap on further gains. In the case of the INR, central bank intervention and high sensitivity to oil prices are likely to constrain appreciation despite supportive macroeconomic trends. Please see our latest FX forecasts here.

Inflation differentials have become a more prominent driver of real effective exchange rates in the post-pandemic era, particularly for currencies like the Chinese yuan, where inflation has dropped sharply. Over the year to April 2025, CNY’s REER declined by 4.8%, while South Korea and Indonesia saw even steeper declines of over 5.5%.

In contrast, the JPY stood out with an 8.5% surge in its REER, which is unsurprising given both its nominal appreciation and the fact that Japan remains the only major economy in the region experiencing relatively higher inflation.

The INR also saw a more modest real depreciation of around 2.5%, driven by a combination of subdued inflation and some nominal currency weakening in the second half of the year.

Latest REER estimates (as of April 2025) suggest that CNY, KRW, TWD, JPY and IDR have the most room to appreciate, while SGD, MYR and PHP appear to have limited upside, with REERs closer to fair value.

SGD continued to appreciate vs the USD and remained one of the top-performing currencies in the region, taking the currency overvaluation to higher levels, especially while growth and inflation have continued to disappoint. To reflect this, we think more fiscal and monetary support is likely on its way, which should further push interest rates downwards. The Monetary Authority of Singapore (MAS) has eased monetary policy twice in a row via a reduction in the S$NEER slope, and we expect another move in the third quarter. We therefore continue to see the SGD underperforming against the rest of the region.

Most Asian economies have seen a notable improvement in current account balances over the past year, especially in Southeast Asia. Countries like Thailand, Malaysia, Vietnam, and Indonesia benefited from stronger exports and tourism recovery. Malaysia and Vietnam remained key beneficiaries of supply chain diversification, as companies continue to seek alternatives to China. Their favourable tariff differentials with China, particularly in the context of ongoing US-China trade tensions, position them well to capture redirected trade flows. Meanwhile, developed economies such as South Korea, Japan, Singapore, and Taiwan continue to maintain large surpluses, reinforcing their external strength.

Global Brent oil prices have climbed 15% over the last two weeks, and Asian external balances remain vulnerable to a sustainable pick-up. As per our estimates, Singapore and Thailand are the most exposed to higher oil prices, and could see a potential impact of 0.7% and 0.5% of GDP, respectively. However, they are also better positioned to manage this impact due to their large and growing current account surpluses of 18.5% and 7.5% of GDP, respectively, as of March 2025.

India is the third most exposed to higher oil prices and remains a current account deficit economy. However, the current account balance has improved significantly over the years and remained at a modest deficit of 1.1% of GDP at the end of 2024.

The Philippines is where we could see higher oil prices having a more damaging impact. The country has the largest current account deficit in the region, driven by rising imports and softer remittance growth, making it highly vulnerable to oil price shocks. A 10% rise in oil prices could widen its deficit by roughly 0.25% of GDP, which stood at an elevated 3.7% of GDP in the first quarter of 2025, pressuring the PHP in the near term.

Looking ahead, trade negotiations could be a key factor in determining which currencies continue to outperform. Korea, Japan, and India have all been engaged in talks for several months, but progress has been limited. The US and Japan failed to reach a trade deal at the recent G7 Summit. There’s a particular focus on 25% tariffs imposed on autos that accounted for 81% of Japan’s trade surplus with the US in 2024 – and Japanese Prime Minister Shigeru Ishiba has fewer negotiating levers to achieve any tariff reductions for the auto sector as he walks a tight rope with his minority government. At the same time, Korea is undergoing a political transition that could further delay negotiations.

Overall, we think India takes the lead in the region when it comes to striking a trade deal with the US, which could be favourable for the INR.

Foreign institutional investor flows in the month of May point towards renewed foreign investor interest in Asia, particularly in Taiwanese equities and Chinese debt, supporting local currency appreciation. We believe there’s still room for exporter hedging ratios to rise, which could further strengthen the TWD in the coming months.

India and Indonesia also saw strong foreign inflows across both equity and debt markets, likely driven by attractive carry in a weakening USD environment. Notably, foreign investors became net buyers of Indonesian debt, with net purchases reaching US$1.5bn – the highest since August 2024.

Looking ahead, we expect India to sustain this momentum, supported by favourable government debt dynamics and anticipated rate cuts. However, we are less confident about the durability of inflows into Indonesian bonds, given persistent fiscal risks.