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FxWirePro: USD/KRW/TWD vols spreads on trade divergence
South Korea's trade appears to be fragile for the recent month, the exports for August based on the first 20 days remained weak at -13.3% yoy. Shipments to China dropped as much as 20% while imports fell less than expected by 2.4% yoy. Exports were once again weighed down by chip exports which plunged 30% yoy and they typically make up about a fifth of the country's exports.
Overall, the trade figures still reflect a gloomy outlook for South Korea. The semiconductor industry is facing headwinds from the global downswing and exacerbated recently by the trade dispute with Japan. There are reports that Japan has relaxed the restrictions of key export components for South Korea’s semiconductor industry. This may be early signs of a thaw in the trade frictions but the base case remains one of a challenging external environment for South Korea near term.
Meanwhile, for Taiwan, July’s export orders fell for the 9th consecutive month but it was surprisingly milder than expected at -3% yoy. This is still early days but there may be signs of bottoming with Taiwan benefitting from the relocation of production out of China back to Taiwan. This should be interesting to watch in the coming months. The government also sounded an upbeat mood, suggesting that export orders could "gradually stabilize" in H2’2019 amid the "peak season for electronics". The latest export orders should be viewed as yet another positive signal that the economy is holding up better than its regional peers such as South Korea and Singapore. In terms of implications for FX, KRW has been the clear underperformer among Asian currencies this year. KRW is down 7% vs USD year-to-date to 1,200 as opposed to TWD which is down only 2% to 31.30. Given the divergence in economic performance, we could see this trend persist for the rest of the year.
Trade tips: USDKRW has experienced a very volatile session over the recent weeks, and clear factors are the draggers for KRW. But for today, USDKRW is heading towards 1200 or below, with KRW having appreciated more than 0.40% versus USD.
We consider a second idea in the Asian vol space, this time aimed at harvesting a positive Carry and to offer some protection in case that the trade dispute between the US and China were to intensify. We were recommending entering a long 4M USDKRW vol/ short 4M USDTWD vol idea for benefitting from the relative cheapness of KRW vol compared to regional peers. It is SGD vol which catches our attention as a possible laggard in the Asian space, if ever as a cheap hedge for the short-vol leg rather than as a conviction trade for hedging an extended risk-off scenario in the region. Courtesy: JPM & Commerzbank