Political uncertainty in South Korea likely to weaken KRW, USD/KRW to head for 1,200 level in weeks ahead

Since the start of November, South Korea’s sovereign CDS premium has surged in response to rising external and domestic uncertainties that have softened the South Korean won markedly. Yesterday, the Korean finance minister confirmed that the government will undertake quick and strong measure to alleviate the increasing market uncertainties stemming from the surprise victory of U.S. President-elect Donald Trump, noted Scotiabank in a research report. The finance minister noted that both the internal and external uncertainties are increasing.

Meanwhile, on Wednesday, Fitch ratings had stated in an email that “political uncertainty related to the allegations against President Park Geun-hye would possibly adversely affect economic activity to a certain degree, as both consumer and investor decisions would be postponed.

The political uncertainty in South Korea is likely to continue to weaken the KRW, but external factors such as Trumflation riks and the rate of the Fed’s rate hikes continue to be strong drivers in the coming months.

The U.S. Fed Chair Janet Yellen’s testimony on the economy on Thursday is likely to set the stage for a rate hike in December, said Scotiabank. The Fed Funds Futures show that the possibilities of the Fed hiking in December remained at 94 percent as of 16 November.

The South Korean won, similar to the Malaysian ringgit, is vulnerable to a bear-steepening UST yield curve, according to Scotiabank. The USD/KRW pair is expected to move towards the 1,200 level in the weeks ahead, although there might be knee jerk declines in USD/KRW if Korean President steps down, added Scotiabank.