Asia FX: Energy shock risk lingers with Hormuz exposure – MUFG

MUFG’s Senior Currency Analyst Michael Wan argues Asian currencies have been buffeted by Iran-related headlines as Asia’s heavy reliance on Middle East energy and Strait of Hormuz flows magnifies risk. While Trump’s softer stance reduces global recession tail risks, the bank remains cautious on Asia FX given unresolved geopolitical incentives, insurance-driven chokepoints, and potential worsening supply disruptions.

Asia FX sensitive to Hormuz and energy flows

"What we do know is that Asian currencies were taken for a ride to some extent in the midst of all this beyond just oil, and certainly for good reason."

"Asia certainly has an outsized exposure to the Strait of Hormuz, with 90% of the oil through the Strait going to Asian markets."

"In addition, Asian economies depend on the Middle East for around 65% of crude oil imports, 27% of refined petroleum, 17% for natural gas, and 45-50% for Natural Gas liquids such as propane – and these are just averages with certainly some markets more exposed than others each in their own different ways."

"As we pointed out, this time is different for Asia in that the Strait of Hormuz crisis is not just about crude oil prices, but the potential for an looming energy shortage possibly sharply constraining economic activity, coupled with a multitude of indirect channels such as shocks to food production, travel, transportation, and tourism which could well look like a COVID-lockdown and Russia Ukraine combined shock."

"That Trump has backed down to some extent is certainly good for the global economy and reduces the left tail risk of a global recession, but we may not be out of the woods yet."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)