North Asian economies face supply-related risks to their balance of payments, even with reports of ample energy reserves. These risks affect their currencies and external positions. Some fiscal measures may be used to limit rises in energy prices. Headline inflation is expected to rise in the near term, and central banks may respond.

Inflation And External Balance Risks

Developed market partners have had wage growth that remains sticky, which has helped keep inflation elevated. This has created price differentials versus North Asia. Those price gaps have pushed down APAC real effective exchange rates (REER). Low wage growth in APAC compared with developed markets has added to the downward pressure on REER. A renewed global supply-driven inflation push could change how exchange rates adjust. Under that scenario, APAC currencies may be able to tolerate higher REER levels. If REERs rise, valuation gaps could narrow. The adjustment would occur through the inflation channel rather than through wage-led price pressure.

Implications For Currency Strategy

We are seeing that North Asian economies face supply-related risks that could impact their balance of payments. Though central banks may use some fiscal tools to soften the blow of energy prices, headline inflation is set to rise in the near term. This will almost certainly force a monetary policy response that favors stronger currencies. This new inflation dynamic is being driven by external factors, unlike what we saw in developed market partners through 2025, where sticky wages were the primary cause. This is creating a significant valuation gap, with North Asian real effective exchange rates (REER) looking heavily depressed. The recent surge in commodity prices, with oil climbing 12% in the last month to over $90 a barrel, is exactly the kind of global supply shock that changes the game. This environment presents an opportunity for these undervalued currencies to strengthen as a way to combat imported inflation. The South Korean Won’s REER, for instance, remains 8% below its five-year average, a gap that can now begin to close. We believe these economies can tolerate, and may even welcome, a higher real exchange rate. Traders should consider positioning for North Asian currency appreciation against the US dollar and the Euro in the coming weeks. Using derivatives, this could involve buying call options on the Korean Won or entering long forward contracts on the Taiwan Dollar. The risk-reward profile for these trades has improved significantly with this shift in the global inflation narrative. Recent data from Japan’s Ministry of Finance shows import prices for February 2026 jumped by 3.5%, the fastest pace in over a year, adding pressure on policymakers. This reinforces the view that central banks in the region will be more inclined to let their currencies rise to absorb these external price shocks. This makes long positions in currencies like the Yen particularly compelling, as a stronger currency becomes a tool for price stability. Create your live VT Markets account and start trading now.

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