KRW likely to remain susceptible to hovering geopolitical tensions on the Korean Peninsula, says Scotiabank

The Korean won is expected to remain susceptible to hovering geopolitical tensions on the Korean Peninsula, declining if the nation’s sovereign CDS premium rises. It has slid 2.05 percent month-to-date amid cumulative equity outflows.

The United States Treasury Department declined to brand Korea a currency manipulator last Friday, while keeping the nation along with other five economies on a previously established "Monitoring List" of trading partners that merit close attention for their currency practices.

"We believe the central bank will refrain from aggressively resisting the appreciation in the KRW if the USD weakens. In the semiannual FX report, US Treasury Department “urges Korea to enhance the flexibility of the exchange rate and vows to be closely monitoring Korea’s currency intervention practices," Scotiabank commented in its latest research report.

By taking account of a gradual pace of the Federal Reserve’s tightening, the KRW will advance after the Fed’s June gathering if geopolitical fears fade at that time. External liquidity is still accommodative as suggested by steadily increasing balance sheets of the European Central Bank and the Bank of Japan. When geopolitical tensions ease, foreign investors will pour funds into local equity markets again.