With EM FX rallying year-to-date, investors might be inclined to take some chips off the table heading into August. Possible factors that could cause disturbances to risk sentiment include a more hawkish Fed or oil prices continuing to head south.

KRW is one of the biggest potential losers from continued JPY and CNY weakness, which we expect. South Korea has the highest export correlation and lowest export complementarity with Japan and China.

Typically, oil is a risk on/off signal for EM currencies with oil importers suffering when oil falls, and while the correlation has broken down between KRW and oil in the past month it should reassert itself if oil continues to decline.

We select long USD/KRW as a hedge against August disruptions for three reasons:

a) The pair is running into intervention flows and downside support,

b) Negative carry is one of the lowest in emerging markets, and

c) USD/KRW is the most near its year-to-date lows, which offers an attractive entry point.