Any slump lower in USDKRW might be drifting out of steam as the pair is the 1102-1140 range that has provided support in the recent past. The price has been oscillating between this range and the expectations for further policy easing (BoK to cut rates another 75bp in the cycle) would hurt the interest-sensitive won as would a renewed deterioration in China’s growth outlook.

On the flip side, the sentiment toward EM currencies could be in the process of shifting and we prefer to focus on regional low yielders in expressing a bullish dollar view. The slew of hawkish commentary from Fed officials in recent weeks has put the possibility of a rate hike back in play for H2.

INRKRW long appears to be attractive due to:

Shift sentiments to EM baskets as Fed defer rate hike possibilities

A good entry point near the low end of the three-year range

Smooth transition to new governor keeps RBI credibility intact and the likelihood that the low vol intervention strategy continues

A positive carry structure to fade the regional currency (KRW) that has appreciated the most compared to its weakest point this year

To capitalize on a recovery from oversold conditions and a double bottom topside breakout.

Well, a confluence of factors ranging from US growth being not too hot or too cold to spur large dollar gains, a lower-for-longer bias setting in for global monetary policy, RMB depreciation not creating a negative feedback loop to global sentiment, and resurgence in portfolio inflows should support EM carry trades over the short term.

We encourage INRKRW longs in 6m NDF at 16.38 (spot ref: 16.529) with a stop at 16.0 (-2.3%) and a target at 17.50 (+6.8%). The position entails positive carry of 44bp/month.

Risk factor: If the underlying conditions that caused EM currencies to rally sharply in the past three months take hold again, both trades are apt to suffer.