South Korean Won Outlook (1-3 Months) – Door to cuts remains open

KRW was one of the worst performing AXJ currencies in May, falling by 3.2% against the USD. Cyclical data and JPY price action have returned focus on KRW's overvaluation. The June Business Survey showed increasingly negative sentiment. Manufacturers' business confidence falls to 77 for June from 82 for May and the Confidence index for non-manufacturers declined to 76 for June from 78 for May. Weak domestic demand and an uncertain economic outlook were cited as major difficulties facing businesses.

Meanwhile trade data was very disappointing. Annual export growth contracted further from -8.0%y/y to - 10.9%y/y, the lowest since September 2009 and annual import growth remained in deeply negative territory (-15.3%y/y). With USD/JPY trading to a new 12 ½ year high, jawboning on the KRW from government officials is likely to increase, expects RBC Capital Markets. 

Annual CPI inflation increased for first time in 7 months in May. Headline inflation rose 0.5%y/y (cons: 0.4%, previous: 0.4%). Core CPI rose 2.1%y/y (previous: 2.0%). Despite the slightly better than expected readings, the outturns remain below the BoK's annual inflation 0.9%. Analysts assumes, the door remains open for further monetary easing of 25bps. Consensus expects only 10bps of cuts this year and rate hikes in early 2016. With the negative output gap continuing for longer than had been anticipated, those expectations seem too optimistic and KRW outperformance looks unsustainable, assumes RBC Capital Markets.