Higher oil prices and a firmer US policy outlook kept Asian currencies under pressure last week, with weakness concentrated in the Korean won (KRW) and Indonesian rupiah (IDR). KRW softness prompted renewed verbal intervention, while Bank Indonesia (BI) stepped up FX operations to support the rupiah.
KRW underperformance was described as flow-driven even as macro fundamentals remained supportive. Equity gains have been concentrated in a small number of AI-linked names, which has driven rebalancing and foreign outflows linked to concentration limits, creating a technical headwind for the currency. In Indonesia, BI raised rates by 50bp in May to 5.25%, yet USDIDR still rose above 18,000 last week; economists expect a further 50bp of tightening this year, with risks tilted towards additional hikes to contain FX pressures.
US Dollar Strength and Impact on Asian Currencies
With oil prices holding above $95 a barrel and the latest US jobs report pushing rate cut expectations further out, the pressure on Asian currencies is unlikely to ease. The US dollar’s strength is the dominant theme we see playing out over the next few weeks. This environment makes us cautious about taking on significant long positions in Asian foreign exchange markets.
Korean Won and Indonesian Rupiah: Technicals, Fundamentals, and Trading Strategies
The weakness in the Korean Won seems technical, not fundamental, driven by foreign investors rebalancing out of a few concentrated AI-linked stocks. Foreign outflows from the KOSPI have topped $2 billion over the past month, pushing the USD/KRW pair higher despite Korea’s solid export numbers. We see this as a near-term trend, so we are considering buying short-dated USD/KRW call options to capitalize on this temporary flow-driven weakness.
For the Indonesian Rupiah, the situation is more complex as Bank Indonesia is actively fighting depreciation, having already hiked rates significantly. Despite this, the USD/IDR has tested the 18,200 level, a multi-decade high, showing the strength of external pressures. We expect this battle between the central bank and the market to create significant price swings, making options that bet on volatility, like straddles, an attractive strategy.
Given the different drivers, we are also looking at a pairs trade of being long the Korean Won against the Indonesian Rupiah. This position is a bet that the Won’s fundamentally sound footing will allow it to stabilize more quickly than the Rupiah. The Rupiah remains vulnerable to further hikes and intervention from its central bank, which could lead to more unpredictable moves.
