KRW likely to remain susceptible to Fed’s monetary policy stance, US-China trade negotiations and Japan-Korea export dispute: Scotiabank

The South Korean won is expected to remain susceptible to the Federal Reserve’s monetary policy stance, the US-China trade negotiations and the Japan-Korea export dispute, while running a tight correlation with the CNH, according to the latest research report from Scotiabank.

South Korea’s CPI inflation is likely to fall into deflationary territory, paving the way for the BoK to lower its policy rate again in October. Future BoK monetary easing will likely prompt foreign investors to pour funds into local bond markets.

In addition, the divergence between the KRW exchange rate and the KOSPI share index indicates downside room for USD/KRW when external uncertainties fade away.

While the DXY Index is likely to remain elevated in the near term on the impeachment inquiry into US President Donald Trump and strong US macro data, the Fed’s need to re-expand its balance sheet later this year could raise the reserve balances and weigh on the dollar finally, the report added.

According to Yonhap news agency, some 300 business leaders from South Korea and Japan on Wednesday gathered in Seoul for the annual conference of the Korea-Japan Economic Association, voicing concerns over an escalating trade feud between the two neighbours and calling for their governments to resolve the issue through dialogue.

"We would like to sell JPY/KRW cross with a target of 10.9 and a stop of 11.3. USD/KRW is expected to continue following movements in USD/CNH in the weeks ahead, while the latter will trade towards 7.00 or even lower levels if the US and China reach a thoughtfully-packaged complete deal or a partial deal in the Washington trade talks set to resume on October 10," Scotiabank further commented in the report.