Menu

Search

Menu

Search

FxWirePro: Append optionality to KRW on BoK’s dovish approach to mitigate FX risks

The latest data releases for South Korea continue to point to a strong economy led by exports but with inflation contained. The final reading for Q3 GDP was revised up slightly to 3.8% YoY from 3.6% previously. This puts it on course to expand by 3.3% this year and continuing in 2018 by another 3.3%. One key driver is the strong external environment with November exports rising nearly 10% YoY.

At the same time, November inflation receded to 1.3% YoY after averaging above the official target of 2% in the first nine months of the year. Lower fuel and housing prices were key factors behind the decline but given higher oil prices of late, it should restrain the downside.

Overall, the moderation in inflation is consistent with Bank of Korea’s (BoK) dovish hike this week by 25bp to 1.5%. We expect BoK to continue to normalize rates but at a gradual pace of two more rate hikes in 2018. Another factor that’s likely to influence the pace of rate normalization is the strong KRW. KRW is the strongest performing currency in Asia vs USD year-to-date, up 11%. For USDKRW, we look for consolidation near term between 1080 and 1120.

Option Trade Perspectives:

We emphasize buying USDKRW 1x1.5 call ratio spreads of near-month expiry, using strikes at 1090 /1110, indicative offer: 0.28% (vs 0.65% for the 1090 strike, spot ref: 1086.30).

Max leverage: 5 times of shorting the topside strike in 1.5 times the notional of the near leg provides a 55% discount to the 1090 call strike. A full reversal of the past two-month performance is required before there would be negative P&L.

Investors could also consider a 1x2 call ratio: the discount to 1090 call strike rises to around 70% and maximum leverage to 8.5x but the level at which the trade starts experiencing negative P&L is much lower (1128).

Low vol and moderately high skew Short-dated volatility parameters are conducive to position for a limited (2-4%) correction.

Vol: One-month implied volatility is at the lowest level since 2014 while the premium of implied over realized is at its two-year average.

Skew: Risk reversals have compressed alongside easing in North Korea tensions and the move lower in the spot, but selling topside is still the most advantageous versus regional peers.

The maximum loss is limited to the extent of the premium paid below 1090 and unlimited above 1144.

  • ET PRO
  • Market Data

Market-moving news and views, 24 hours a day >

2018-07-16 15:57:11
0m
2018-07-16 15:52:52
0m

July 16 16:00 UTC Released

USBean Oil Stocks

Actual

1.766 Blb

Forecast

1.807 Blb

Previous

1.856 Blb

July 16 16:00 UTC Released

USSoy Crush

Actual

159.228 Bushels M

Forecast

159.637 Bushels M

Previous

163.572 Bushels M

January 31 00:00 UTC 240031240031m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

January 31 00:00 UTC 240031240031m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

January 22 19:00 UTC 251851251851m

ARTrade Balance

Actual

Forecast

Previous

-1541 %

January 31 00:00 UTC 240031240031m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

January 22 19:00 UTC 251851251851m

ARTrade Balance

Actual

Forecast

Previous

-1541 %

January 31 00:00 UTC 240031240031m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

January 31 00:00 UTC 240031240031m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

January 31 00:00 UTC 240031240031m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

Close

Welcome to EconoTimes

Sign up for daily updates for the most important
stories unfolding in the global economy.