FxWirePro: Add hedging tool to KRW’s softness on mixed bag of South Korean fundamentals

The South Korean economy has witnessed 2.8% y/y in the Q1 of 2018, a notch lower than market consensus at 2.9%. QoQ growth maintains a decent pace at seasonally adjusted 1.1%. At first glance, growth numbers look fine.

However, as a bellwether of a global trade, South Korea is facing strong headwinds – on the one hand, it has to make significant concessions to the US on the trade front.

On the other hand, it will also be negatively impacted amid China-US trade disputes, as the economy is highly exposed to global technology supply chain. Furthermore, inflation has been surprisingly lower than expected, and the Bank of Korea sees that the inflation is likely to undershoot the 2% target this year.

The won has traded resiliently in the face of the ratchet higher in trade tensions, which come at a time when global IP has lost some momentum. Trade tensions are also constraining US SPX valuations and by extension, Asian equity valuations and foreign capital flows into the region. Year-to-date offshore equity flows are modestly negative for Korea.

As such, we believe that a rate hike is hardly on the table. All these illustrate a bearish backdrop for KRW – it has lost more than 1% versus USD so far this week, and we expect that KRW will remain soft over the foreseeable future.

Trade tips: As an export-oriented economy, South Korea is also on the top list of potential victims if trade conflicts intensify. The market started to buy back USD and pushed USDKRW back to the 1080 hurdle. In order to arrest downside risks, 1m ATM puts are advocated.

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