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Bank of Korea hiked the policy rates by 25bps to 1.75% this morning, in line with market expectations. Before today’s decision, there were some economists arguing that the BOK would remain on hold given the softening growth and inflation momentum.
However, the BOK is seemingly concerned about the widening rates gap against the US as the central bank only hiked the interest rate twice over the past 12 months.
That said, we tend to believe that today’s hike is a pre-emptive move.
Indeed, KRW weakened after today’s rate decision, which is a typical “sell the fact” phenomenon.
Looking ahead, the BOK is likely to take an overall cautious approach, which implies another 1-2 rate hikes next year as Fed would continue to tighten.
Throughout 2018, we have been deliberated in our EM Asia investment strategy recommendations, seeking a higher margin of safety in the context of fatter event and tail risks. Stabilization in foreign portfolio equity flows and the high starting point of current account surpluses continue to favour a neutral, not negative, stance on the trade- oriented currencies (KRW, TWD and SGD). If we are not advocating an outright positive stance on these currencies, it is because China’s policy accommodation is being spread not only across fiscal / monetary / regulatory fronts, but also encompasses FX.
Trade tips: We were recommending entering a long 6M USDKRW vol/ short 6M USDTWD vol idea for benefitting from the relative cheapness of KRW vol compared to regional peers. It is SGD vol which catches our attention as a possible laggard in the Asian space, if ever as a cheap hedge for the short-vol leg rather than as a conviction trade for hedging an extended risk-off scenario in the region. We, now, advocate USDKRW shorts on trading grounds for downward targets upto 1110 levels in the medium-run. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly USD spot index is flashing at 59 levels (which is bullish), while articulating at (14:55 GMT).
For more details on the index, please refer below weblink:
