UBS: North Asian currencies show more resilience than South Asia; recommend long RMB, KRW

Overview

This UBS global strategy report deeply analyzes the divergence phenomenon in Asian macro markets. Despite ceasefire optimism and AI capital expenditure driving equities to new highs, global oil inventories remain low and the risk of geopolitical conflict escalation places pressure on Asian FX and rates markets. The core conclusion is that significant internal divergence will occur within Asia: North Asian currencies (Renminbi, Korean Won, New Taiwan Dollar) will relatively outperform due to stronger trade terms, external buffers, and economic insulation, while South Asian currencies (Indian Rupee, Thai Baht, Indonesian Rupiah) will be pressured by deteriorating current accounts and capital outflow risks. The report accordingly offers specific FX pair trading and yield curve trade recommendations.

Core views

The relative advantage of North Asian currencies is clear. The report notes North Asian economies show stronger resilience to trade term shocks, especially supported by tech export recovery boosting current accounts. For Renminbi (CNH), the Real Effective Exchange Rate (REER) has only risen 3% since 2H 2025, far lower than the prior 20% decline, indicating undervaluation. Considering China's current account surplus over 4% of GDP (a post-financial crisis high) and the authorities’ possible tolerance for moderate appreciation to advance RMB internationalization, the report maintains a bullish view, targeting an additional 3-4% appreciation versus the trade-weighted index. The Korean Won (KRW) combines strong fundamentals and attractive valuation. Although offshore family asset allocation weakened the won in recent years, the policy tolerance for depreciation is reducing, with memory chip exports surging over 250% YoY. A current account surplus possibly exceeding 10% of GDP in 2026 and South Korea’s sovereign bonds inclusion in the World Government Bond Index (WGBI) could bring about $30 billion unhedged inflows, pushing USD/KRW toward 1400 in H2 2026. The New Taiwan Dollar (TWD) is also favored. Its REER is at the bottom decile of the past decade, lagging the export boom (+50% YoY in Q1). With AI cycle-related stock inflows recovering and carry attractiveness at the 98th percentile in 15 years, the report recommends shorting USD/TWD via option strategies. South Asian currencies face multiple headwinds. The Indian Rupee (INR) is vulnerable to oil price shocks and capital outflows. Sustained oil prices over $100/barrel could widen the current account deficit to 2.5–3.0% of GDP. Indian service exports face upside risk from AI; the central bank may tolerate moderate depreciation. The report suggests steepener yield curve trades to manage rate risk. The Thai Baht (THB) is losing external buffers, with current account surplus narrowing from 3% in 2025 to near balance. Rising energy prices and costly jet fuel may hamper tourism. The report remains bearish. The Indonesian Rupiah (IDR) faces policy uncertainty (fiscal deficit risk) and falling reserve adequacy; net reserve import cover dropped to four times, so the bearish stance remains.

Analysis framework

The report uses a combined top-down and bottom-up analytical framework. First, from a global macro perspective, it identifies the divergence between ‘ceasefire optimism’ and ‘potential oil price surge’ and notes Asia’s sensitivity as a major energy importer. Next, it divides Asian economies into North Asia and South Asia based on three dimensions: trade terms shocks, external buffer capacity, and economic insulation, and compares them. In its currency analysis, the report integrates valuation metrics (like REER percentiles and deviation versus export shares), international balance sheet analysis (current account surpluses/deficits, reserve adequacy), and policy stance evaluation (central bank exchange rate tolerance, fiscal risks). It also incorporates market positioning and carry trade attractiveness, providing nuanced trade strategies such as option fly structures to capture directional volatilities or yields.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Trade Terms and Current Account Transmission

  The report analyzes how energy prices (supply shocks) impact the import-export balances of Asian countries to judge current account health and infer currency trends. This is a classic method to forecast financial asset prices through real economy supply-demand balances.

• Valuation Method

  Real Effective Exchange Rate (REER) and Export Share Deviation Analysis

  The report examines not only historical REER percentiles but also compares changes to export shares globally. If currency depreciation exceeds the adjustment needed for export share growth, it is deemed undervalued. This is a relative valuation approach combining fundamental competitiveness.

• Macroeconomic frameworkTaylor rule

  Application of Taylor Rule in Emerging Market Interest Rate Decisions

  The report uses Taylor Rule models to estimate theoretical policy rates, finding many emerging markets’ actual rates at historical lows, implying future tightening pressure. This helps readers understand potential central bank policy paths balancing inflation and growth.

• Fixed Income and Credit AnalysisSpread analysis

  Yield Curve Steepener Trade

  The report recommends a ‘1s5s steepener’ in India, expecting short-term rates to rise from policy tightening while long-term rates remain capped by growth concerns, steepening the curve. This is a classic bond market trade reflecting different monetary policy and economic outlook expectations.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Renminbi (CNH)

  Beneficiary: Strong current account, undervalued, policy supports internationalization

  Strengths

  External surplus hits record highs, valuation cheap by 3% versus export shares

  Comparison

  Outperforms South Asian currencies and some Latin American currencies

  Risks

  Sudden export growth contraction

• Korean Won (KRW)

  Beneficiary: Memory chip export boom, bond inclusion in WGBI attracts inflows

  Strengths

  Valuation cheap >5%, current account surplus may exceed 10% of GDP

  Weaknesses

  Geopolitical uncertainty may cause short-term equity outflows

  Comparison

  Strongest fundamental reversal logic among North Asian currencies

  Risks

  Continued offshore family asset allocation

• New Taiwan Dollar (TWD)

  Beneficiary: AI export boom, very high carry attractiveness

  Strengths

  REER at decade low, carry at 98th percentile in 15 years

  Comparison

  Valuation lags export performance, large catch-up potential

  Risks

  Global semiconductor demand volatility

• Indian Rupee (INR)

  Detriment: Oil price sensitivity, fragile capital account

  Weaknesses

  Current account deficit risks, valuation not cheap

  Comparison

  Weaker than North Asian currencies, similar to Southeast Asian peers but higher valuation

  Risks

  Oil above $100, accelerated capital outflows

• Thai Baht (THB)

  Detriment: Eroding external buffers, tourism hurt by high oil prices

  Weaknesses

  Current account surplus narrowed significantly, low policy intervention willingness

  Comparison

  Weaker among South Asian/Southeast Asian currencies

  Risks

  Hormuz Strait disruption causes oil spike

• Indonesian Rupiah (IDR)

  Detriment: Fiscal risks, reserve adequacy declining

  Weaknesses

  Falling carry attractiveness, low net reserve coverage

  Comparison

  Faces MSCI reclassification and fiscal deficit pressures

  Risks

  Fiscal deficit exceeding 3% cap, debt outflows

Key data

• China Current Account Surplus>4% of GDPPost-financial crisis high, supports RMB
• Korean Won Valuation Deviation>5% cheapUndervalued by more than 5% relative to South Korea’s export share
• Taiwan Export Growth50% y/yQ1 2026 data driven by AI
• Thailand Current Account Surplus Forecast~2% of GDP (2026E)Significantly narrowed from ~5% in 2025
• Indonesia Net Reserve Import Coverage~4xBelow 2013’s 4.8x, indicating reduced buffer
• USD/KRW Target1400Forecast for H2 2026

Impact & implications

The report suggests investors reposition Asian assets from broad pan-Asian exposure toward more granular regional selection. For North Asia — particularly China, Korea, and Taiwan — the current macro environment and valuations offer attractive risk-reward profiles suitable for increasing exposure or capturing appreciation via derivatives. For South Asia — especially India, Thailand, and Indonesia — investors should be wary of input inflation and current account deterioration risks from oil price volatility, and consider hedges via currency shorts or yield curve steepeners. This differentiated strategy helps protect portfolios amid macro uncertainty and capture alpha.

Risks

• Continued or escalating geopolitical conflicts driving oil prices above $150/barrel
• Worsening global demand harming Asian exports
• Unexpected shifts in US interest rate policy affecting global capital flows
• Fiscal policy mistakes in Asian countries triggering credit risks

What to watch

• Probability of ceasefire agreement before end-June (currently down from 80% to 40%)
• Changes in global oil inventories and oil price trends
• Capital inflows following South Korean bond inclusion in WGBI
• Fiscal deficit execution in India and Indonesia
• Further changes in Thailand’s current account surplus