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Will the Bank of Korea (BOK) initiate Asia’s rate hike cycle? The market thinks so. KRW strengthened by more than 1% against USD this week, with USDKRW touching its lowest level this year. The extraordinarily strong currency is largely due to rising expectations of a rate hike this month.
In fact, the latest BoK minutes showed that three of seven board members already voted for a hike at the last monetary policy meeting.
As the growth outlook continues to improve, and BOK governor Lee is widely seen as a “hawk”, the market has started to prepare for the first rate hike since 2011.
In addition, the IMF raised its growth forecast for South Korea this week, fueling rate hike speculation further.
As a result, bond yields are picking up across the board. On the back of rising rates and strong hedging needs from exporters, KRW will likely remain resilient over the short term.
Technical levels: Except for the late-week bounce, USDKRW has been the outlier as the heavy price action has resulted in a retest of critical support at the 1110/09 medium-term range lows.
With short-term momentum studies now oversold, we are closely monitoring for signs of a sustained reversal.
A push above the 1122/25 breakdown/pivot area would be the first bullish signal that the oversold setup is registering with the price action.
Options Strategy: Risk markets lurched lower this week amid thin summer liquidity as geopolitics took center stage. Without any edge in calling the outcome of the latest flare-up, our instinctive reaction is that this too shall pass as many other false alarms involving North Korea have before, and that investors can do worse than to position for an eventual retracement lower in USDKRW spot via net vol-selling option structures such as USD put/KRW call ratio spreads that earn decay while awaiting normalization and do no P/L damage if tensions escalate.
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