USD/KRW likely to rally through 1,200 along with USD/CNH breaking above 7.0 if US-China trade talks break down at Osaka Summit, says Scotiabank

The USD/KRW currency pair is expected to rally through 1,200 along with USD/CNH breaking above 7.0 if the US-China trade talks break down at the Osaka Summit or later, according to the latest research report from Scotiabank.

BoK Governor Lee Ju-yeol said on Wednesday morning that the central bank will closely monitor external uncertainties including US-China trade tensions and the semiconductor cycle, pledging to "take appropriate measures to accommodate changes in economic conditions."

South Korea's exports fell 16.6 percent y/y in the first 10 days of June, largely due to decreased shipments of semiconductors. Central bank chief Lee had ruled out the possibility of a rate cut in the past few months, with the belief that the South Korean economy will gather pace during the second half of the year.

"In our view, Governor Lee’s remarks suggest a drastic shift from his previous commitment to standing pat. The BoK will follow suit on August 30 if the Fed decides to lower the target range for the federal funds rate by 25 bp to 2.00-2.25 percent at the July 30-31 FOMC meeting that has been fully priced in Fed Funds Futures," the report further commented.

If the BoK stays on hold in August, it will likely cut its policy rate by 25 bp on October 17 after the Fed ends its balance sheet runoff in September. Similarly, Indonesia’s Finance Minister Sri Mulyani Indrawati told reporters in Jakarta on Wednesday that the BI may adjust its monetary policy stance due to latest global development, joining other central banks to counter a global economic slowdown.

Meanwhile, geopolitical situation on the Korean Peninsula remains stable with emerging possibility of a third Trump-Kim Summit, Scotiabank added in its note.