"Stock-Forex Linkage" Malfunctioning! Rare Cracks Emerging in Asian Markets

The linkage between the stock markets and exchange rates in Asia is showing cracks, a signal that is prompting global funds to reassess their investment strategies in the region. The MSCI Asia Pacific Index and Bloomberg Asia Dollar Index, which used to move in sync, have seen their 30-day correlation drop below zero for the first time since September 2024. Across the region, many countries are experiencing a phenomenon where domestic stock markets are continuously hitting record highs, while their local currency exchange rates are weakening. This differentiation is most pronounced in South Korea. The KOSPI index in South Korea surged by 76% in 2025, outperforming global counterparts significantly, and continued to rise in 2026, but the Korean won exchange rate fell to a nearly 17-year low this week. Markets in Japan, China, Taiwan, and other countries are also showing similar trends. Although the duration of this trend remains uncertain, one thing is clear in the short term: a strong performance in the stock market no longer implies a strong currency. This contradictory signal across asset classes is prompting investors to prepare for potential increased volatility, with some institutions already preparing to increase hedging tools. "This is definitely a big surprise, especially in South Korea," said Ian Samson, a portfolio manager at Fidelity International managing $16 billion in assets. "It is strange and not necessarily healthy to have a huge current account surplus on one hand, a strong stock market performance on the other hand, and yet the domestic currency not strengthening accordingly." Traders point out that two independent forces are currently driving the direction of the stock market and the foreign exchange market: the artificial intelligence (AI) boom is pushing stock markets higher, while exchange rates are facing outflows of funds, partly due to several Asian central banks implementing rate cuts to protect their economies from the impact of US tariffs. "The simplest reasonable explanation is that these markets are dancing to different tunes," said Homei Lee, Senior Macro Strategist at Lombard Odier Singapore Ltd. He believes that the stock market reflects thematic and sectoral developments, while exchange rates are more influenced by fund flows and macro factors, such as expectations of a rate cut by the Federal Reserve in the first half of the year diminishing. He views this divergence between stocks and exchange rates as a short-term market feature. Hedging Strategies Institutions like Vantage Point Asset Management Pte and Berenberg are considering adding hedging tools to their ACR HOLDINGS positions. For investors using the US dollar as their funding source, the good news is that hedging costs are decreasing. According to compiled three-month forward implied yield data, the average cost of hedging the eight major Asian currencies has dropped to 0.31%, close to the lowest level in a year. "In the short term, there may still be room for the stock market to rise. However, the current situation may indicate the need to hedge risks as soon as possible, and the current low hedging costs are favorable," said Nick Ferres, Chief Investment Officer at Vantage Point Asset Management Pte, which manages a global macro fund focused on Asia. Some institutions maintain a relatively calm attitude towards this situation. "While the exchange rate perspective is important, we are not too concerned about the mild exchange rate pressures facing the Asia Pacific region in general, in terms of the outlook for stocks in export-oriented economies that are experiencing a strong recovery," stated Aninda Mitra, Head of Asian Macro and Investment Strategy at BNY Investments. From multiple perspectives, the investment boom in AI infrastructure is the biggest variable influencing the future direction of Asian stock markets. Currently, the Asian stock markets are off to a good start in 2026, and investors generally expect this upward trend to continue. "For unhedged investors, the situation is more complex," said Ulrich Urbahn, Head of Multi-Asset Strategy and Research at Berenberg, managing 39 billion (approximately $45 billion) in assets. "Even though the stock market may bring positive returns, any slight weakening of the local currency against the US dollar could erode returns or increase portfolio volatility."