Asia FX Talk · FOMC decision looms as oil and US yields stay elevated

Key arguments

• Rising US Treasury yields and elevated oil prices dominate sentiment, pressuring Asian currencies broadly lower against the dollar.
• The Fed faces a difficult trade-off: persistent inflation risks versus higher government debt servicing costs and strain on rate-sensitive sectors such as housing.
• MUFG remains cautious on THB given Thailand's heavy reliance on imported energy, deteriorating terms of trade and weaker portfolio flows.
• MUFG also remains cautious on IDR after a Finance Ministry leadership change, with Brent above $100 raising fuel subsidy costs and challenging the sub-3% GDP budget deficit commitment.

Corresponding source evidence

1. Escalating tensions in the Middle East continue to threaten energy supply chains, with attacks on Saudi energy infrastructure and disruptions to key transport routes adding upside risks to oil prices.
2. Rising oil import costs, deteriorating terms of trade and weaker portfolio flows leave the baht exposed to further downside in our view.
3. Maintaining the government's commitment to keeping the budget deficit below 3% of GDP may require additional expenditure restraint elsewhere.