FxWirePro: Spot on USD/KRW tail risk premium as Korean exporters unlikely to relax

The Bank of Korea maintained status quo in this monetary policy, to keep the policy rates at 1.50% as widely anticipated. Given that the economy is on a solid footing at this junction, there is a high possibility that the rates will be lifted again in the coming months. However, there are still a lot of uncertainties along the road.

Primarily, KRW has strengthened by more than 12% since the beginning of 2017, which has somewhat tightened the monetary conditions. As an export-oriented economy, too strong currency is definitely not a piece of good news.

Secondarily, while the growth picture seems to be decent, the inflation outlook remains soft. Recent data even indicate a downside of the current BOK’s inflation forecast.

Third, the current term of BOK’s President Lee will end March 31. Unfortunately, there is no clear succession plan at this moment. All told, it makes sense to expect to see more volatility ahead.

For now, USDKRW unsurprisingly has the biggest tail premium, reflecting geopolitical concerns.

We could foresee bullish risks in the dollar on account of a) Inflation convincingly bounces back, further validating the dots; b) Feds’ hiking cycle most likely to continue c) Rest of world normalization is depriced.

Hence, bidding call ratio spreads to serve reduced cost of hedging. If at all the pair may bounce back, especially, on the above-mentioned drivers, long legs are likely to keep upside risks on the check.

Subsequently, we advocate buying Mar’18 USDKRW 1x1.5 call ratio spreads in this write up, using strikes at 1048/1110, indicative offer: 0.28% (vs 0.65% for the 1090 strike, spot ref: 1070).