SHORT THE KOREAN WON?

Takeaway: We think the BoK is gearing up to ease monetary policy and/or intervene in the FX market to arrest KRW appreciation.

CONCLUSIONS:

  1. Our GIP model sees the South Korean economy in Quad #3 (i.e. Growth Slowing as Inflation Accelerates) over the next few quarters, a catalyst that should weigh on inflows into the nation’s capital markets.
  2. Moreover, we see both growth and inflation undershooting official and consensus targets over the intermediate term. Slowing growth in the US, Japan and “Old China” should cap exports gains (i.e. the primary driver of Korea’s 1Q14 GDP growth acceleration) going forward and annualized FX strength – particularly in 2Q and 3Q – should limit the impact of global cost-push inflation from the commodities markets.  
  3. To the extent our models are proven correct, we would anticipate a dovish/interventionist policy response out of the BoK in the currency market at some point over the intermediate term. That would be an easy “sell”, given the KRW’s material outperformance on a 1D, 1W, 1M, 3M, 6M, 1Y, 18M and 3Y basis.
  4. Our FX valuation models see downside in the KRW vis-à-vis the USD on the order of 5-6% on a REER basis and 7-9% on a carry basis. Historical correlations suggest deltas of this magnitude in the currency market are likely to weigh on the Korean equity market as well as the country’s USD debt.
  5. That being said, however, we’re not raging bears on either asset class. South Korea has proven unsurprisingly resilient to changes in foreign portfolio flows into EM economies in recent years, which is very much in line with our proprietary EM crisis risk modeling work. Additionally, what the KOSPI lacks in dividend yield support, it makes up for in sheer [perceived] cheapness that may continue to perpetuate a fairly consensus intuitional bid into the nation’s stock market.

SHORT THE KOREAN WON? - SOUTH KOREA

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SHORT THE KOREAN WON? - FX

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Source: Bloomberg


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 Source: Bloomberg

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Source: IMF

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Feel free to ping us with any follow-up questions. Have a great evening,

DD

Darius Dale

Associate: Macro Team