Korean currency has won the trading against US dollar in last 2 months, KRW gained almost 9.23% to evidence 6 months lows in USDKRW.

Since the end of February, the KRW rallied the most in Asia and significantly outperformed the rest of EM with the exception of high-beta commodity producers (COP, RUB and BRL).

Foreign demand for EM assets improved markedly in March, especially for Asian equities, and the main macro risks plaguing EM have subsided, so there are fundamental reasons for the recent strength.

However, the speed of the move has been excessive and is currently worth fading.

The decline in USD/KRW is similar to the last two corrections (March and October of last year) experienced in the two-year up-cycle. EM positioning looks stretched based on offshore-onshore FX implied yields, RSI and retracements in implied vol and risk reversals.

Thereby, we conclude saying the uptrend that has lasted for more than a year is now looking quite weaker.

FX Option Trading (USDKRW):

Favour optionality to directional trades. We are inclined to position for a partial retracement of the down move through call spreads, as calling the bottom is difficult and adding directional spot exposure is risky at the moment.

Call spreads are preferred to vanilla structures given elevated skew and favourable cost reduction.

Buy USD/KRW 2W call spread with strikes of 1,165-1,125 for a net credit.

The net delta of the position should be around 18 (1,165 strike = 34 delta, 1,125strike = 17 delta) and selling the far leg (OTM strikes) likely to reduce the cost of the ITM call by almost close to 40%.

Maximum gain is 3.9% (ideal risk-reward).