FxWirePro: Correlation between KRW and CNY and advantageous to fade the outsized appreciation – RRs and IVs to substantiate

It seems that nothing can stop CNY and KRW, at least for now. KRW strengthened by another 0.2% versus USD this morning.

The rate hike expectation in South Korea has triggered the recent sell-off in USDKRW.

Some sort of dollar strength arisen lately but that was part of a broader turnaround in USD sentiment rather than anything KRW specific. Geopolitical issues have not ratcheted higher over this period but at the same time, the market remains wary that this could change quite quickly. This, in turn, leaves the market reluctant to chase USD/KRW lower.

As KRW accounts for 10% of China’s official CNY index, a rapid appreciation of KRW will translate into a lower USD-CNY exchange rate as the PBoC intends to stabilize the CNY-index.

However, even after past strong sessions, the CNY index has actually eased somewhat. In other words, if CNY fully tracks the KRW’s performance, USDCNY still has room to trend lower.

The G3 capex theme is a positive, as is the strength in China’s new economy (with the technology sector expanding strongly over the past 12 months). Korea is well placed to benefit from a continuation of these trends.

In fact, the Korean authorities think that KRW’s recent appreciation is overdone, warning that it will take actions to crack down the “excessive” activities.

However, it seems that nobody takes this seriously as traditionally the Bank of Korea is not an active player in the FX market. At the end of the day, the market cares about what you did, not what you said.

Risk-reward favors long dollar exposure from a short-term (1-2m) trading perspective. Large move relative to history and EM peers: The 5% KRW appreciation in the past two months represents a two-standard-deviation move (over a 2m period) since 2012 and the performance gap versus EM peers is very high.

Reversal after a large appreciation: In four episodes since 2012 when USDKRW has fallen by a similar magnitude as currently, the cross has subsequently corrected higher in three instances. Also, the BoK has been passive for most the year but could become more active in limiting downside given the speed of appreciation and peer outperformance.