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We expect the Asian currencies in aggregate to appreciate modestly against the US dollar in H2 2026, supported by a softer USD trend, easing energy prices, resilient external balances, and foreign capital inflows into selected markets. However, unlike previous regional rallies, this cycle is unlikely to be broad-based. Instead, Asia is increasingly transitioning from a convergence story to a divergence story, with currency performance being shaped by countries’ participation in the AI-led investment cycle, external competitiveness, and domestic policy fundamentals.
A key theme for H2 is the emergence of a “two-speed” Asia. On one side are economies benefiting directly from AI-related semiconductor and technology demand, including Taiwan, South Korea and Malaysia (to some extent), increasingly, China. Strong exports, large current account surpluses, continuing capital expenditure in advanced technology sectors, and improving investor sentiment should support TWD, KRW, SGD and CNY. China’s currency outlook has also improved as stronger technology competitiveness, policy support for new growth engines, robust exports and a still-large trade surplus help offset structural headwinds. However, the appreciation of these currencies is likely to be measured rather than explosive, as markets are entering a more mature phase of the positive AI shock and valuations in the technology sector are elevated.
On the other side are currencies facing weaker domestic demand, external vulnerabilities, or policy uncertainty. Indonesia continues to grapple with investor concerns surrounding domestic policy direction despite proactive tightening measures by Bank Indonesia. Thailand faces soft consumption, slowing investment and a weakening tourism cycle, while Vietnam’s rapid domestic credit growth continues to generate depreciation pressure on the dong. India remains a more balanced story: near-term support from lower oil prices and RBI measures may help the rupee outperform regionally, but medium-term structural outflow pressures remain.
The trajectory of Asian inflation has become more constructive. Higher energy prices linked to Middle East tensions pushed inflation higher across many economies during the first half of the year, but we believe inflation has likely peaked in most Asian countries. Falling oil prices under our base case, together with still-moderate domestic demand, should allow inflation to gradually ease through H2. China remains a regional outlier with subdued inflation, while inflation across most of Southeast Asia is expected to remain broadly manageable.
Central bank policy divergence is likely to increase. China’s PBOC is expected to maintain an easing bias, while Malaysia, Taiwan and Thailand stand pat. By contrast, those in India, Indonesia, the Philippines, South Korea and Vietnam—could retain a tightening bias or deliver selective rate hikes to support currencies, contain imported inflation and reinforce policy credibility. Monetary policy decisions will increasingly reflect domestic conditions rather than broad synchronization across the region.
Overall, we expect Asia FX to benefit from a softer USD backdrop in H2 2026. While yield spread remains a relevant factor, factors – like capital flows, AI-related investment, trade surpluses and country-specific fundamentals – are likely to be more dominant determinants of Asia currency performance. The strongest opportunities should remain concentrated in economies linked to technology and AI supply chains, while currencies facing domestic policy challenges or weaker external balances are likely to lag behind.
AGMR
