USD/KRW to trade higher from mid-May

Last Tuesday, the Bank of Korea lowered its 2016 economic growth outlook to 2.8% as compared with the earlier projection of 3%. The South Korean economy expanded 2.7% y/y in Q1 after growing 3.1% in Q4 2015. Meanwhile, in the following months, the central bank is likely to cut its policy rate as more dovish members replaced four members of the monetary policy board last week, according to Scotiabank.

There were continuous inflows of portfolio in the past two sessions. But the Korean won depreciated against the US dollar amidst broad risk-aversion. Foreign investors have increased their holdings in local stocks by USD 1.74 billion and listed bonds by USD 1.44 billion month-to-date.

“We stay watching portfolio inflows in the coming weeks, while maintaining our short TWD/KRW position entered at 35.89 on 8 April morning with a target of 34.64. USD/KRW pair is likely to trade higher from mid-May particularly when approaching June FOMC meeting and Brexit Referendum”, said Scotiabank.

Meanwhile, North Korea seems to be preparing for a fifth nuclear test. If the nuclear test takes place in May, the USD/KRW pair will temporarily rise, noted Scotiabank. The BoK then is likely to intervene in order to smooth FX vols. Even if the direct effect on the Korean won will be restricted and for a brief period of time, ongoing geopolitical tensions within the country’s peninsula are expected to keep the KRW weak for some time, added Scotiabank.