FxWirePro: BoK stands pat, USD/KRW IRS trade ideas

The Bank of Korea kept its benchmark rate steady on 11 September, as widely expected. Alongside the decision, BoK's governor Lee mentioned growth is still likely to hit the Bank's 2.8% target this year. His comments that the current benchmark interest rate hasn't reached the lower limit fuelled expectations of further rate cuts, but we note the BoK's subsequent clarification that those comments were "not a rate cut signal" which was important.

Fundamentally, we have been encouraged by signs CPI inflation is basing (August: 0.2% MoM, 0.7% YoY). But inflation remains low and well below the BoK's target band of 2.5 to 3.5%, which will be revised shortly.

As a result, we recommend adding longs on USDKRW 6m NDF and pay 5y KRW IRS We believe KRW rates are due for a correction in the near term. The catalyst is likely to be an unwinding of a heavy long position by foreign investors in KTB futures and IRS, with BoK rate cut expectations already largely priced into the rates markets. We also recommend long USDKRW 6m NDF given the likelihood of a BoK rate cut.