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The downside in USDKRW has been bounded by 1113, even with the EUR marching higher and EM currencies strengthening. It has witnessed a good run in 1Q among EMFX, subsequently, resulting in the KRW being one of the top-performing EMFX space, a range trading environment has set in.
We doubt policymakers will permit too much strength on Korean perspective even in the face of rhetoric from the US on US-Korea free trade and the upcoming Treasury manipulation report. At a minimum, KRW should underperform the EM landscape to year end and, if Chinese growth starts to falter, the KRW will be a prime candidate for short positions.
Key drivers, for now, would be: The waning appetite for Korean equities, ongoing deterioration in rate differentials, and the Chinese slowdown resuming into 2018 could see the USDKRW move higher.
Risks: Stronger-than-expected Chinese growth would prevent the KRW from weakening, whereas ongoing tensions on the Korean peninsula would keep risk premium elevated.
We had advocated deploying call ratio spreads to hedge USDKRW’s upside risks on status quo BoK, we continue to uphold the strategy on hedging grounds.
Bank of Korea (BOK) stood pat to maintain rates unchanged at 1.25% as broadly anticipated. The rates were left on hold since cutting by 25bp in June-2016. The economy is advancing with the Korean central bank projection of 2.8% growth this year. At the same time, inflation is expected to be contained at 1.9% which is within BOK’s target of 2%.
Options Strategy: Risk markets lurched lower this week amid thin summer liquidity as geopolitics took center stage. Without any edge in calling the outcome of the latest flare-up, our instinctive reaction is that this too shall pass as many other false alarms involving North Korea have before, and that investors can do worse than to position for an eventual retracement lower in USDKRW spot via net vol-selling option structures such as USD put/KRW call ratio spreads that earn decay while awaiting normalization and do no P/L damage if tensions escalate.
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