Balance-of-payments strains shape flows – BNY

BNY’s Geoff Yu highlights that APAC balance-of-payments pressures from the Iran conflict and energy by-products are increasingly driving currency flows, with MYR, THB, AUD and PHP in focus. Core North Asian exporters appear more resilient thanks to reserves and savings, while Southeast Asia and Australia face fuel shortages and weaker terms of trade. Markets are expected to stay cautious on these currencies despite some positioning resilience.

Energy shock drives APAC currency caution

“Four weeks into the Iran conflict, markets are steadily appreciating the importance of the Gulf region in exporting energy by-products. From helium to urea, many of these inputs are essential to whole swathes of the APAC economy. While mineral fuels remain the biggest source of regional balance-of-payments stress, the global nature of the current supply shock will likely lead to a wider negative terms-of-trade shock, forcing governments to react accordingly.”

“Core North Asian export-driven economies have sufficient energy resilience over the coming months. Crucially, their reserve coverage levels are high enough to withstand higher import costs over an extended period. High levels of precautionary savings and strong fiscal resources (ex-Japan) represent an additional buffer, to the extent that we don’t see strong FX or fixed income outflows as a major concern for now.”

“The situation is different for the rest of APAC. Some of the most aggressive government responses along the lines of fuel rationing have been seen in Southeast Asia – President Marcos of the Philippines stated on Tuesday that he couldn’t even rule out planes being grounded due to the lack of jet fuel. Even Australia, despite being a crucial net exporter of natural gas, is facing shortages of refined petroleum, which is impeding a stronger terms-of-trade adjustment.”

“Despite the clear challenges, the only regional currencies that were net sold over the past month are those whose starting position was overheld. Reducing exposures was therefore quite straightforward. MYR, THB and AUD, by contrast, were already significantly underheld, so the marginal benefit of adding to hedges for cross-border investors proved more limited.”

“We expect markets to remain cautious on these currencies, but the swift change in behavior can help build resilience over time and reduce risk premia.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)