Emerging Asian assets are under pressure as higher US Treasury yields, a stronger US dollar and an oil shock add to stress in Indonesia, the Philippines and India. These moves are linked to capital outflows, weaker currencies and higher funding costs, while inflation risks rise for bond markets.
In Indonesia, the rupiah (IDR) has reached record lows, with equities down and 10-year bonds near 6.76%. IDR has fallen 14% since President Prabowo Subianto took office in October 2024, and Moody’s and Fitch have downgraded Indonesian bonds.
Indonesia Index And Policy Shock
MSCI removed six Indonesian companies from its index and dropped 13 from its small-cap index. These changes followed concerns tied to government policy shifts.
In the Philippines, a planned 7-year bond sale was cancelled after bids implied yields up to 8.125%. There were PHP 37bn of bids for a planned PHP 30bn sale, and all bids were rejected.
In India, 10-year rates fell 3bp to 7.10% after rising 7bp the previous day. The government increased fuel prices by 3%, its first rise in four years.
Given the intense pressure from a stronger dollar and higher U.S. yields, we need to position for continued divergence in Asian emerging markets. The environment feels very similar to the stresses we saw back in late 2024 and early 2025, driven by the same factors. We should focus on trades that isolate the weakest currencies while recognizing relative strength elsewhere.
Trade Positioning And Relative Value
The Indonesian rupiah is the clearest short, given the combination of political risk, credit downgrades, and MSCI index removals. Looking back, the rupiah’s slide past 16,200 per dollar in April 2024 showed how quickly sentiment can turn, and the current situation appears far more severe. We should use non-deliverable forwards (NDFs) to build short IDR positions against the dollar, anticipating further weakness.
The failed bond auction in the Philippines signals a developing funding crisis, as the government is unable to borrow at rates the market is demanding. This suggests Philippine interest rates will be forced higher, creating an opportunity for us. We can position for this by using interest rate swaps to bet on rising yields over the next several months.
India, by contrast, is showing signs of fiscal discipline with its fuel price hike, making it a point of relative stability. This sets up a classic pairs trade where we can go long the Indian rupee (INR) while simultaneously shorting the Indonesian rupiah (IDR). This strategy allows us to profit from Indonesia’s specific weaknesses while hedging against a broad move in the U.S. dollar.
On the equity side, the MSCI rebalancing is a direct catalyst to short Indonesian stocks, likely through index futures. The removal of major companies will trigger forced selling from index-tracking funds, adding to the downward pressure. This is a clear, event-driven trade that aligns with the negative macro picture.
This entire situation has echoes of the 1997 Asian Financial Crisis, where capital flight and currency contagion were dominant themes. Back then, central bank interventions often failed in the face of overwhelming market pressure. We should therefore remain skeptical of official support and watch for signs of accelerating capital outflows from the region.
