AI boosts emerging Asian currencies, but policy and fiscal worries keep markets cautious: BNP Paribas

[JAKARTA] BNP Paribas sees emerging Asian currencies trading in a broadly range-bound and volatile environment over the next six months, supported by easing global monetary conditions and sustained artificial intelligence-related investment.

However, they are constrained by fiscal concerns, geopolitical tensions and lingering policy uncertainty.

In a briefing late Thursday (Jan 22), Parisha Saimbi, forex strategist EM (Emerging Market) Asia at BNP Paribas, said the global macro backdrop remains “relatively resilient”, a factor that should help underpin risk appetite for EM assets, including currencies in South-east Asia.

Currencies ride the AI wave

She noted that ongoing AI-linked investment is emerging as a structural driver, underpinning global growth and trade rather than remaining a short-lived trend.

“We don’t see it as a bubble that’s about to burst. Of course, there’s always some risk, and it is one of the three main risks we’re monitoring this year, but it is not our central scenario that the bubble will actually burst.”

The bank has developed a framework assessing AI’s impact through trade, foreign direct investment, portfolio flows and a market’s readiness to adopt AI technologies.

Under this framework, South Korea, Malaysia, Singapore, Taiwan and China are among the best positioned to benefit from AI-linked export growth and investment inflows.

Malaysia, in particular, stands out due to strong inflows into data centre construction, robust domestic demand and relative macro stability.

The ringgit surged more than 10 per cent against the US dollar in 2025, emerging as Asia’s top-performing currency with strategists expecting it to continue its upward momentum in 2026.

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However, Saimbi cautioned that AI is only one part of the currency equation.

Another key risk for investors is renewed trade and tariff uncertainty stemming from US policies, particularly as markets monitor legal and political developments that could reshape the current tariff framework.

Against this backdrop, BNP Paribas expects the US Federal Reserve to deliver one more rate cut – likely in March – before keeping the rate on hold.

A resurgence of inflation, driven by overly stimulative US monetary policy or renewed geopolitical tensions, such as conflicts in Ukraine or the Middle East, could limit room for further easing.

Across Asia, expectations for further rate cuts are diminishing, Saimbi said. She noted that Asia should benefit from last year’s rate cuts, which are beginning to filter through into domestic economies, as well as potentially lower trade uncertainty if tariffs ease.

While some central banks – including Bank Indonesia and the Bank of Thailand – retain a dovish bias, room for easing is increasingly constrained by currency pressures and inflation risks.

“For Indonesia, the bias is still dovish, but financial market pressures mean cuts are unlikely until conditions ease,” Saimbi said.

Thailand may have space for one more cut at most, while elsewhere in the region, markets may begin speculating about whether the next move is eventually a hike rather than a cut.

Rupiah faces competing forces

The rupiah remains one of the more vulnerable currencies in the region, reflecting a combination of domestic and global factors, BNP Paribas noted.

It forecasts US dollar-rupiah at around 16,900 by the end of this year and 17,200 by end-2027, with markets repeatedly testing the psychologically important 17,000 mark.

Saimbi said Bank Indonesia’s decision to keep rates unchanged in recent meetings was expected, as policymakers seek to balance the need to support growth with the imperative to stabilise financial markets.

While domestic activity was soft last year, she pointed to early signs of improvement, including firmer credit growth, stronger retail activity and rising consumer confidence, suggesting earlier rate cuts are starting to gain traction.

Still, investor confidence has been undermined by fiscal concerns. Indonesia’s fiscal deficit reached 2.92 per cent of gross domestic product last year, close to the longstanding 3 per cent ceiling, raising worries about limited policy space.

Those concerns have been amplified by recent political developments, including the change in Indonesia’s finance minister and the nomination of President Prabowo Subianto’s nephew Thomas Djiwandono to a deputy governor post at Bank Indonesia, which has raised questions about institutional independence.

The rupiah hit a record low on Tuesday, falling to 16,955 per US dollar as the news broke.

“These factors have made investors nervous about Indonesian assets,” Saimbi said.

In the near term, she expects the rupiah to stabilise, supported by central bank intervention and ample foreign exchange reserves.

She noted that the 17,000 rupiah per US dollar level also serves as a psychological barrier for the market, and said she expects authorities will be keen to defend it for now. That said, she added, it does not rule out the possibility of the level being breached in the future.