FxWirePro: Korean bonds gain traction as FIIs raised net cash inflow despite lingering hopes of BoK’s further easing

The net inflows into KRW bonds in recent times has continued to recover, increasing to KRW 888bn in May, the 3rd monthly net inflows in a row despite surprising rate cut by BoK. We perceive this as an unusual response to the unexpected central bank’s move as an innocuous gamble to remain in the safe haven.

Foreign investors net purchased (before redemption) KRW 1.56trn of bonds with remaining maturity at 1-5Y, 852bn with remaining maturity of more than 5Y, while they net sold KRW 1.52trn of bonds with maturity less than 1Y.

We continue to expect the yield and rate curves to stay flat upon demand for mid to longer tenors, despite room for front-end rates to go slightly lower.

The KRW rates market is pricing in only a 20% odds of another BoK cut in the next three month, not surprising upon the realization of a June cut.

The chance is for the market to gradually increase its expectation for another cut of a 25bps in Q3.

Although we see some strength in dollar ahead of FOMC speech after monetary policy which is most likely to remain unchanged, the Korean currency has won the trading against the US dollar in this month so far and continued its 3rd-month gains, KRW gained almost 9.23% to evidence 6 months lows in USDKRW.

We reiterate, 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).

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.