It's been observed that there is a disparity between Korean exporting sentiment and IP owing to the fall in export pricings and inventory accumulation. But we think the 3.4% drop in exports in March affected IP performance negatively. The shipbuilding sector has been on a downtrend since 2013, Q1 of 2015 data indicates that this trend will likely persist for a prolonged period. The correlation between exports and IP is now less, as industrial costs sensing costlier inventory management.
The three sectors with the largest weights in IP appear to have struggled in March, namely auto-making production reduced by 2.5% yoy and mobile exports dropped 34%. South Korea is expected to announce March industrial production (IP) data on 30 May. We expect IP to have fallen 1.3% mom on a seasonally adjusted basis, and 2.0% yoy.
Derivatives strategies:
Overview: Bearish on Won
Strategy: Protective put and long forwards
All these facts and probabilities are signaling weakness and potential threats for slowdown in Korean economy. Prevailing rate for USD/KRW is 1073.53 in spot. Korean importers can add 2 months forward contract volumes for USD payables as the above key data is schedule to be announced on 30th may which is approximately one month from now where traders in Korean markets can go for protective put.
