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The Bank of Korea (BoK) is expected to leave its policy rate unchanged at 1.50 percent at its monetary policy meeting on Friday morning after delivering a 25 bp rate cut on July 18. However, South Korea’s benign inflation outlook and economic slowdown provide scope for the central bank to lower its policy rate again in October.
South Korea’s CPI inflation eased to 0.6 percent y/y in July from 0.7 percent a month ago. On the back of the base effect, the headline inflation will likely fall into deflationary territory in the period of August to November, raising the BoK’s real policy rate.
On the growth perspective, this export-driven economy’s overseas shipments have been contracting on year for eight months in a row, casting a shadow on the economic growth. In July alone, China’s imports from South Korea plummeting 20.1 percent y/y amid ongoing US-China trade disputes.
The KRW will remain susceptible to the Fed’s monetary policy stance, the US-China trade negotiations and the Japan-Korea export talks, while running a tight correlation with the CNH. Dudley’s suggestions may have stunned the market and other Fed officials, the report added.
The WSJ report said "Mr. Dudley’s argument would be to withhold potential medicine out of a belief that this could cure the disease," citing Jared Bernstein, an economist serving in the Obama administration.
"In our view, the Fed’s rejection of Dudley’s call does clear the way for the US central bank rolling out more monetary easing measures in order to sustain the expansion, particularly if considering the deepened UST yield curve inversion," Scotiabank further commented.
Prime minister Lee Nak-yon said Tuesday that South Korea can reconsider termination of military info-sharing pact if both countries find a solution before the pact ends on November 23 and Japan withdraws export restrictions. USD/CNH is anticipated to trade in a range of 7.1-7.2 at the moment.
The PBoC keeps setting onshore USD/CNY fixing lower than expected recently, together with tightening offshore yuan liquidity conditions. If the US and China agree to hold a fresh round of trade talks in Washington in September, it will improve risk sentiment somewhat further.
Meanwhile, China’s latest measures to encourage consumption indicates that the nation has prepared contingency plans in case of a no-deal scenario.
"USD/KRW is likely to range trade between 1,200 and 1,220 in the near term. The pair will breach 1,220 and rally further if the US-China trade tensions escalate again, but could fall below 1,200 if Beijing is still willing to send a trade delegation to Washington in September," the report added in its comments.
