FxWirePro: Adjustments in KRW derivatives portfolio on dovish BoK

The KRW rates market has re-priced significantly higher its expectation for BoK easing, now pricing in a 66% chance of a cut in the next three months versus only around 35% before the May MPC minutes. But in this meeting of monetary policy decision, the forecasts are to remain unchanged at 1.5%.

The consensus among economists is for no change at the 9 June meeting. The market is looking for a non-unanimous decision. The South Korean economy advanced 0.5% q/q in the March quarter of 2016, faster than an earlier projection of a 0.4% expansion in an earlier estimate, preliminary estimates showed.

It is the weakest growth since the third quarter of 2015 as private consumption, facilities investment and exports contracted. 

 The KRW IRS curve is to remain flat with easing already in the price while long-end capped by bond demand. KTB-UST yield spreads and KTB futures - cash bond yield spreads suggest more investor interest at long-end KTBs.

USDKRW was the biggest mover in Asia NDF trading on Friday (-2%). Our USDKRW call spread is close to flat as expiry is nearing, risk-reward signals closing the position. However, the aggressive bulls can still stay in these call spreads ahead of Fed’s rate decision on 15th June.cent