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Bank of Korea (BOK) stood pat to maintain rates unchanged at 1.25% as broadly anticipated. The rates were left on hold since cutting by 25bp in June-2016. The economy is advancing with the Korean central bank projection of 2.8% growth this year. At the same time, inflation is expected to be contained at 1.9% which is within BOK’s target of 2%.
As such, there are few reasons to alter policy either way at this stage. Instead, the persistent geopolitical uncertainties related to the North Korea missile launches are causing BOK to be cognizant of the downside risks to sentiment and growth. The other risks highlighted were the pace of Fed normalization, US government policies, and protectionism.
On the domestic front, elevated household debt levels remain a concern and will deter BOK from lowering rates further. Going forward, we expect BOK to keep monetary policy accommodative and to adopt a wait-and-see approach. For USDKRW, it is slightly higher today around 1125 on the firmer USD tone overnight.
Options Strategy: Risk markets lurched lower this week amid thin summer liquidity as geopolitics took center stage. Without any edge in calling the outcome of the latest flare-up, our instinctive reaction is that this too shall pass as many other false alarms involving North Korea have before, and that investors can do worse than to position for an eventual retracement lower in USDKRW spot via net vol-selling option structures such as USD put/KRW call ratio spreads that earn decay while awaiting normalization and do no P/L damage if tensions escalate.
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