FxWirePro: USD/KRW technical, fundamental and hedging pack

In this write up, we emphasize dollars robustness against Korean currency and the hedging solution to keep this risk on check.

We recently went long USDKRW at around 1168 and earned return s at 1208. The rally in KRW over the past week is not sustainable and affords the opportunity to re- load on long dollar risk.

Importantly, the conditions (positioning, technicals, macro and financial market conditions) are not in place for EM currencies to repeat the rally they experienced in Q1 last year.

As we could foresee upside risks in USDKRW, on hedging grounds we still like to maintain longs in USDKRW 1m NDFs, so, go long USD-KRW 1m NDF at 1179 with a target at 1245 (+5.3%) and a stop at 1155 (-2.1%). The time horizon is 1-3 months and positive carry is approximately 2bp/month.

We retain our thesis that USD-EM has further upside in Q1. The KRW remains in the cross hairs of higher US yields, protectionism and geopolitics, a China growth slowdown and RMB depreciation.

Ongoing deterioration in rate differentials should keep the KRW trading on the back foot and negative forward points afford the opportunity to establish long dollar exposure with a positive (albeit small) carry profile.

Current short term technicals are benign (RSI at 41) momentum (moving average crossovers) is positive, and the 100 & 200DMAs should act as downside resistance (for those who prefer a larger stop loss).

Risks factors (US yields, Trump, technicals): Further correction in US yields would benefit the EM FX complex while better growth data and stabilization in RMB would take the edge off the KRW. A tail risk event would be for the US administration to either mention a “weak” dollar policy, or something along the lines of not favoring a “strong dollar” policy. Confirmation of a break in trend line support from the September lows could result in short-term strength.