Asian Central Banks Hike Rates to Stabilize Currencies; Bullish on Renminbi and Tech-Linked Currencies

Overview

This report analyzes foreign exchange market dynamics and central bank policy responses in Emerging Market Asia (EM Asia) against the backdrop of energy shocks triggered by Middle East conflicts. The report notes that although a stronger US dollar and high oil prices have pressured most Asian currencies, central banks have effectively curbed rapid depreciation through rate hikes, foreign reserve interventions, and capital flow management measures. Goldman Sachs believes that unless the Middle East conflict is resolved and oil prices fall significantly, the overall support for the US dollar against Asian currencies will persist. In terms of specific currency performance, the report presents a structural divergence: it is bullish on the Renminbi, Korean Won, New Taiwan Dollar, and Malaysian Ringgit, which benefit from strong exports and policy support; and bearish on the Indonesian Rupiah, Thai Baht, and Philippine Peso, which are burdened by energy import dependence and domestic risks.

Core views

Asian central banks have escalated their policy response, shifting from initial foreign reserve consumption to broader monetary tightening. The Bangko Sentral ng Pilipinas (BSP) was the first to hike rates to 4.50%, while Bank Indonesia (BI) raised rates by 50bp and 25bp in May and June respectively, introducing measures to attract foreign capital inflows. Although the Bank of Korea (BoK) has not yet hiked rates, its tone has turned hawkish, with two rate hikes expected in the second half of the year. These measures have somewhat contained the decline in Asian currencies. In China, the Renminbi has embarked on an independent appreciation trajectory. Despite weak economic data in April, strong exports have supported growth, and reflation driven by oil prices has limited the scope for comprehensive monetary easing. The People's Bank of China (PBoC) appears to tolerate an orderly, gradual appreciation of the Renminbi. An annualized appreciation rate of approximately 4% can offset the holding costs for foreign investors without excessively damaging export competitiveness. Since last December, exporters have settled an additional ~$150 billion in foreign exchange. The Renminbi is expected to rise to 6.70 within 6 months and to 6.50 within 12 months. South Korea and Taiwan are benefiting from the AI-driven semiconductor export boom. South Korea's current account surplus has increased, but the Korean Won has underperformed due to net foreign selling of $80 billion in stocks (concentrated mainly in two semiconductor giants, triggering passive selling due to index weight caps). If the stock market rally broadens, capital outflows are expected to ease, and the fundamental appeal of the Won remains intact. Taiwan's exports grew strongly year-on-year (up 51.7% in May), and the current account surplus is projected to reach 25% of GDP, supporting the New Taiwan Dollar's strength against the US dollar. The central bank is expected to raise rates to 2.25%. India has stabilized the Rupee through foreign exchange control measures, including exempting foreign investment in government securities from capital gains tax. Despite rising oil prices, India's economic growth exceeded expectations (Q1 GDP up 7.8%). Goldman Sachs considers the Rupee attractive as a high-yield currency and recommends shorting THB/INR. The Indonesian Rupiah faces multiple pressures, including concerns over bureaucracy brought by policies concentrating natural resource exports, doubts about the inflation targeting framework due to the expansion of the central bank's mandate, and risks related to MSCI index status review, maintaining a bearish view. The Malaysian Ringgit has performed well due to its net energy exporter status and benefits from the semiconductor supply chain, but potential political risks from an early general election warrant caution. The Monetary Authority of Singapore (MAS) is expected to keep policy unchanged, with the Singapore Dollar already at the upper bound of its strong policy band, leaving limited upside. The Thai Baht is expected to continue underperforming other regional currencies due to high oil prices harming the current account, disruptions in tourism, and long-term structural issues.

Analysis framework

The research report adopts an analytical framework of 'Macro Shock - Policy Response - Fundamental Divergence.' First, it identifies the energy price shock caused by Middle East conflicts and the strengthening US dollar as core external variables, analyzing their differential impact on the terms of trade for various Asian economies (e.g., energy importers vs. exporters). Second, it tracks the policy toolkits of central banks, distinguishing the effectiveness of foreign reserve intervention, interest rate adjustments, and capital flow management measures. Finally, combining current accounts, export structures (particularly the semiconductor cycle), inflation pressures, and domestic political/policy risks, it conducts relative value assessments and rankings for major Asian currencies.

Methodology notes

• Macroeconomic framework

  Terms of Trade Shock Analysis

  Analyzes how energy price fluctuations change the relative prices of imports and exports, thereby affecting national current accounts and exchange rates. For example, rising oil prices worsen the terms of trade for energy-importing countries (such as Thailand and the Philippines) while benefiting energy-exporting countries (such as Malaysia).

• Industry/Sector Analysis FrameworkUpstream-Midstream-Downstream Transmission in Supply Chain

  Transmission of Semiconductor Industry Chain to Exports and Exchange Rates

  Analyzes how the global semiconductor demand boom translates into current account surpluses for South Korea, Taiwan, and Malaysia through export channels, thereby supporting their currency exchange rates and providing relative resilience even amidst a strengthening US dollar.

• Event-Driven Gaming and Behavioral Finance

  Passive Capital Flows Triggered by Index Weight Limits

  Explains that the weights of two semiconductor giants in the South Korean stock market exceeded legal diversification thresholds, forcing foreign funds to sell. This technical capital outflow depressed the Korean Won exchange rate despite strong fundamentals.

Asset mapping & comparison

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

• Renminbi (CNY)

  Beneficiary: Strong exports, undervaluation, and central bank tolerance for gradual appreciation

  Strengths

  Current account surplus; policy-guided orderly appreciation to aid internationalization

  Weaknesses

  Weak domestic demand; drag from the real estate sector

  Comparison

  Strongest performer among Asian currencies, independent of US dollar movements

  Risks

  Escalation of global trade friction; sudden slowdown in export growth

• Korean Won (KRW)

  Beneficiary: Current account surplus driven by semiconductor exports

  Strengths

  AI-driven export boom; improved fiscal conditions

  Weaknesses

  Significant foreign equity outflows; index concentration risk

  Comparison

  Fundamentals are stronger than currency performance; significant potential if capital outflows reverse

  Risks

  Decline in global semiconductor demand; geopolitical tensions

• Indonesian Rupiah (IDR)

  Negatively Impacted: Domestic policy uncertainty and current account pressure

  Strengths

  Significant central bank rate hikes and provision of FX incentives

  Weaknesses

  Concerns over bureaucracy arising from new natural resource export regulations; fiscal discipline risks

  Comparison

  Poor performer among Asian emerging currencies; rising risk premium

  Risks

  MSCI index downgrade; loss of inflation control

• Thai Baht (THB)

  Negatively Impacted: High oil prices hit current account; tourism recovery hindered

  Strengths

  Government fiscal stimulus plans provide short-term support

  Weaknesses

  Declining structural competitiveness; central bank remains on hold

  Comparison

  Laggard in the region; difficult to rebound significantly even if oil prices fall

  Risks

  Tourism recovery falls short of expectations; political turmoil

Key data

• Renminbi 6-Month Target Exchange Rate6.70Gradual appreciation path
• Renminbi 12-Month Target Exchange Rate6.50Gradual appreciation path
• Net Foreign Outflow from Korean Stocks$80 billionYear-to-date, mainly affected by overweight positions in semiconductor equities
• Taiwan May Export YoY Growth51.7%Far exceeding consensus expectation of 41.2%
• India Q1 GDP YoY Growth7.8%Exceeded expectations, strong investment
• Bank Indonesia June Rate Hike25bpNon-scheduled emergency hike; previously hiked 50bp in May
• Philippines April CPI YoY7.2%Far above the 3% target
• Short THB/INR Trade Target2.70Entry price 2.91, stop-loss 3.05

Impact & implications

For investors, the Asian foreign exchange market presents clear structural opportunities. The gradual appreciation trend of the Renminbi provides exchange rate support for allocating Chinese assets and reflects the policy intent to promote Renminbi internationalization. The upcycle in semiconductors not only benefits related stocks but also directly supports the currencies of South Korea, Taiwan, and Malaysia, making them preferred choices for hedging against a stronger US dollar. Conversely, currencies of economies highly dependent on energy imports and facing domestic policy uncertainties (such as Indonesia and Thailand) face sustained depreciation pressure, making them suitable as funding currencies or short targets. While central bank interventions have stabilized exchange rates in the short term, they cannot fundamentally reverse the medium-term trends determined by energy prices and geopolitics.

Risks

• Escalation of Middle East conflicts leads to further soaring oil prices, worsening the terms of trade for Asian energy-importing countries.
• Federal Reserve policy is more hawkish than expected, driving the US dollar to strengthen beyond expectations.
• Global semiconductor cycle peaks and declines, hitting exports from South Korea, Taiwan, and Malaysia.
• Domestic political risks in major Asian economies (such as early elections in Malaysia, policy changes in Indonesia) trigger market panic.

What to watch

• Progress of Middle East conflicts and crude oil price trends.
• Subsequent rate hike paths and intensity of FX intervention by various central banks.
• Results of MSCI's review of Indonesia's stock market status (guidance update expected on June 23).
• Whether capital flows in the South Korean stock market improve as market breadth expands.
• China's export data and changes in the Renminbi central parity pricing mechanism.