Iran War Spurs Extreme Bear Scenarios for Asia Currencies, Bonds

t(n2{2c(o7ajcyac6a437tv[_media_dl_1.png Bloomberg

Article content

(Bloomberg) — The Iran war is piling pressure on emerging Asian markets, pushing some currencies and bond yields toward levels once considered unlikely.

Article content

As the conflict drags on, some analysts are mapping out more extreme bearish scenarios. That includes India’s rupee weakening to 100 per dollar, the Indonesian rupiah sliding to 18,000, and the Philippine peso depreciating to 65 as high energy prices fuel inflation and weigh on import-dependent economies.

Article content

Article content

Article content

Bond markets are also feeling the strain. Benchmark yields in India may test peaks last seen in 2022, while the head of the money market association in the Philippines say yields may climb toward 8%, a multi-year high.

Article content

Article content

Asia is reeling from a more than 40% surge in crude prices since the war broke out late February. The pain is being felt most acutely in India, Indonesia and the Philippines, which rely on foreign capital to fund current-account deficits. Rising US Treasury yields have further dent the appeal of emerging-market assets, pressuring central banks to tighten policy even as the economic fallout from the conflict deepens.

Article content

Indonesia has already moved to defend the rupiah, with the central bank surprising markets on Wednesday with a larger-than-expected rate hike and a pledge to step up currency intervention.

Article content

“The deterioration in import costs relative to export prices will continue to weigh on the currencies of net oil importers” if energy prices continue to rise, said Rajeev De Mello, global macro portfolio manager at Gamma Asset Management SA. Higher crude prices may also hurt bonds, as they stoke inflation or widen fiscal deficits where authorities absorb part of the shock through fuel subsidies, he said.

Article content

Article content

The rupiah, rupee and the peso have been among the worst-performing emerging-market currencies, falling between 4.5% and 6.5% since the war began.

Article content

Aberdeen Investments and MetLife Investment Management are among those that see the possibility of the rupee weakening to 100 per dollar. DBS Group Holdings Ltd. has revised its forecast range to 95-100 from 90-95. The consensus estimate compiled by Bloomberg shows 94.75 by year-end, while the one-year dollar-rupee forward breached 100 for the first time on Wednesday.

Article content

In Southeast Asia, Gamma’s De Mello said the peso could weaken beyond 65 if oil prices continue to climb. HSBC Holdings Plc now expects the peso to end the year at 60.8, compared with its previous forecast of 59.8, while projecting the rupiah to hit 17,400 from an earlier estimate of 17,300.

Article content

BNY Mellon strategist Wee Khoon Chong wrote in a May 13 note that the rupiah could slide to 18,000 in the near term. Bloomberg consensus estimates see the peso ending the year at 60.3 and the rupiah at 17,100.

Article content

As strains on Indonesia mounted, President Prabowo Subianto on Wednesday announced plans to tighten state control over commodity exports. He estimated the country loses as much as $150 billion annually through “leaks” such as under-invoicing, where exporters fail to declare the full value of shipments.