Weak April exports data to weigh on South Korea’s Q2 economic growth

South Korean exports shrank again in April on year-on-year basis due to weak foreign demand. The economic growth for Q2 is expected to be weighed on due to weak exports, according to Scotiabank. Moreover, South Korea’s CPI inflation reached 1% y/y last month. It is expected to further slowdown in the following months, noted Scotiabank. Weak outlook for inflation gives leeway to the Bank of Korea to further ease policy in order to strengthen the economic growth.

The Bank of Korea had downwardly revised its economic growth outlook for 2016 to 2.8%, as compared with the earlier projection of 3%. The central bank is likely to lower its policy rate by 25bp in Q2 2016, added Scotiabank.

Foreign investors, on 3 May, added USD 121.4 million to the holdings in local stocks and listed bonds by USD 187.7 million. Inflows of portfolio are expected to keep coming in future. However, the South Korean won might trade with broad market sentiment before North Korea’s prospective fifth nuclear test and April NFP, according to Scotiabank.

If the nuclear test takes place, the USD/KRW pair is expected to rise temporarily. The central bank is then likely to intervene to smooth FX vols, noted Scotiabank. Even though the direct effect on the won will likely be limited and for a short period of time, the geopolitical tensions that are around on the Korean peninsula is likely to continue weakening the South Korean won from time to time, said Scotiabank.