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KRW is right under the spotlight. USDKRW dipped below the 1100 mark, heading the lowest in more than two years. While the Bank of Korea (BOK) continues to warn that it would take actions if there is excessive KRW appreciation, the market is keen to hold KRW long positions.
The trade figures of the first 20 days of November, released this morning, surprised the market on the upside by a large margin, further boosting the positive sentiment. Robust trade performance also somewhat eased the market concerns that the electronic sector could experience some headwinds in Q4. In the meantime, there is some degree of spillover effects from KRW into most Asian currencies.
However, CNY is comparably weaker in the past few weeks – as KRW accounts for around 10% of the CNY index, a slightly higher USDCNY resulted in an approximately 0.7% decline in CNY index over the past two weeks.
As the growth outlook continues to improve, and BOK governor Lee is widely seen as a “hawk”, the market has started to prepare for the first rate hike since 2011.
In addition, the IMF raised its growth forecast for South Korea this week, fueling rate hike speculation further.
As a result, bond yields are picking up across the board. On the back of rising rates and strong hedging needs from exporters, KRW will likely remain resilient over the short term.
Technical levels: Except for the yesterday’s bounce, USDKRW has been the outlier as the heavy price action has resulted in a retest of critical support at the 1089 medium-term range lows.
With short-term momentum studies now oversold, we are closely monitoring for signs of a sustained reversal. In the process, it has managed to breach below the psychological 1,100 levels.
A push above the 1119/1122 breakdown/pivot area would be the first bullish signal that the oversold setup is registering with the price action.
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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