FxWirePro: BoK maintains status quo policy sensing no need for cuts - Vol spreads to hedge KRW

The Bank of Korea (BoK) left rates unchanged at 1.75% as expected. There was no revision to the overall growth outlook which was revised down to 2.5% for 2019 last month.

However, BoK once again highlighted the downside risks to global growth due to the trade tensions. The governor divulged that the decision was not unanimous unlike last month with one of the seven members voting for a rate cut at the press conference. 

The reason for BoK’s reluctance to cut rates and follow some other Asian central banks such as Malaysia, India, and the Philippines who have lowered rates this year is because of weakness in the currency. KRW is down over 6% vs USD year-to-date to the 1192 level vs the average drop for Asian currencies of -1%. This is because South Korea is one of the most exposed to global trade and especially electronic exports. 

We expect BoK to adopt a wait-and-see approach at this juncture. While USDKRW is seen between the 1180-1200 range near term and if it climbs above 1200, we could see increased intervention from BoK to at least mitigate KRW’s decline.

This is the worst quarterly growth since the global financial crisis, dragged down by weak investment and trade performance, highlighting the headwinds are intensifying for export-oriented economies that rely on global demand. It appears that the Asian economies have not benefited yet from a perceived China stabilization. 

USDKRW has experienced a very volatile session in the recent past, and clearly evident today’s GDP numbers are KRW negative. USDKRW is heading higher at around 1190 levels this morning, with KRW having deprecated more than 3.5% versus USD year to date. 

Overall, in a nutshell, this leaves USDKRW still very much in the ‘buy on dips’ league. A broad 1150-1190 range in the currency is likely over the next few months.

Bullish KRW risk scenario: Domestic economy rebounds from Q1 slump. 

Bearish KRW risk scenarios: Trade conflict intensifies; G3 CapEx cycle remains soft; BoK rate cut gets priced in faster. 

Hence, we consider an idea in the Asian vol space, this time aimed at harvesting a positive Carry and to offer some protection in the case that the trade dispute between the US and China were to intensify. 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 FX 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. Courtesy: JPM & Commerzbank

Currency Strength Index: FxWirePro's hourly USD spot index was at 60 (bullish) while articulating (at 11:29 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex