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USD/KRW is likely to trade at around 1,150 by end of this year; with the Fed likely to hike interest rates in December, we see upside risk to USD-KRW. The market is currently pricing in 71 percent chance of a hike by December as compared to 60 percent at the start of the month.
On the FX front, the KRW has strengthened by 3.6% against the USD on a year-to-date (YTD) basis. This makes it the third best performing Asia ex-Japan currency, behind the IDR (+5.9%) and TWD (4.0%) and above the average of 1.5% for the Asia ex-Japan currencies.
The main driver was foreign inflows into the domestic market, following the Fed’s change in stance in March and June. The inflows were also helped by improving sentiment following S&P’s credit rating upgrade in August. On a YTD basis, a combined 22.6bln USD has entered the stock and bond market, the highest in the five countries tracked by Bloomberg.
Further, Bank of Korea (BoK) Governor Lee said recently that the central bank still has space for monetary easing despite rates being at all-time lows and that further cuts would be warranted if the ongoing restructuring effort triggers recession concerns. He also played down expectations that the central bank would resort to the use of Quantitative easing (QE).
"At this stage though, we don’t see an urgent need for BoK to cut rates with growth still seen at around its forecast range," Commerzbank commented in its latest research report.
