Korea: KRW May Not Be As Strong As Originally Expected
18/02/2010
Recent volatility in USD/KRW reveals vulnerability of KRW to external shocks — News from China’s change of RRR to the current European sovereign risks have led to a recent acceleration of KRW weakness compared to other major Asian countries.
Strengthening FX market environment has limitations on stabilizing market — Many market participants expected that the increase in foreign reserves and improvement of external debt structure might lead to a stronger KRW and minimize volatilities in the USD/KRW. Even if Korean foreign reserves increased to USD274bn in Jan-2010 (from USD201bn in Nov-2008) and the proportion of short-term external debt fell to 36.8% in 3Q09 (from 44.5% in 3Q08), the outcome would still fall short of our current expectations.
Remaining sensitivity of risk aversion leads to a weaker KRW — Uncertainties in global financial markets, such as the sovereign risk of countries such as Portugal, Italy, Ireland, Greece, and Spain, and a global fiscal deficit seems to keep nagging the markets, especially emerging markets, by increasing the tendency of risk aversion and the net outflow of capital to ‘safe havens’. As seen recently, the KRW is one of the currencies which might lose value when these issues rise. Since the complete solution of these risks is expected to take some time, volatility and weakness of the KRW might be more significant than expected.
Economic recovery/delay of BOK policy rate hikes also causes a weaker KRW — An increase in import demands due to recovery of domestic demand, along with higher oil prices, would reduce the surplus of trade balance. The trade balance in January 2010 recorded USD461mn of deficit. We recently changed our forecast on the timing for an initial hike of the BOK policy rate from 1Q to 3Q of this year. A delay in rate hikes could weaken the KRW in 1H, with the current 2% policy rate maintained.
We now forecast annual average USD/KRW to rise 1,100 (previous 1,074) — We expect the USD/KRW could fall to 1,120 at the end of 1Q and 1,090 at the end of this year. We expect a weaker KRW to add more inflationary pressures by raising KRW-based import prices. Given the demand-pull inflation pressure we expect in 2H, the BOK would need to raise the policy rate aggressively to control inflation in 2H. We forecast BOK will raise the policy rate by 100bp during 2H of this year.
18/02/2010
Recent volatility in USD/KRW reveals vulnerability of KRW to external shocks — News from China’s change of RRR to the current European sovereign risks have led to a recent acceleration of KRW weakness compared to other major Asian countries.
Strengthening FX market environment has limitations on stabilizing market — Many market participants expected that the increase in foreign reserves and improvement of external debt structure might lead to a stronger KRW and minimize volatilities in the USD/KRW. Even if Korean foreign reserves increased to USD274bn in Jan-2010 (from USD201bn in Nov-2008) and the proportion of short-term external debt fell to 36.8% in 3Q09 (from 44.5% in 3Q08), the outcome would still fall short of our current expectations.
Remaining sensitivity of risk aversion leads to a weaker KRW — Uncertainties in global financial markets, such as the sovereign risk of countries such as Portugal, Italy, Ireland, Greece, and Spain, and a global fiscal deficit seems to keep nagging the markets, especially emerging markets, by increasing the tendency of risk aversion and the net outflow of capital to ‘safe havens’. As seen recently, the KRW is one of the currencies which might lose value when these issues rise. Since the complete solution of these risks is expected to take some time, volatility and weakness of the KRW might be more significant than expected.
Economic recovery/delay of BOK policy rate hikes also causes a weaker KRW — An increase in import demands due to recovery of domestic demand, along with higher oil prices, would reduce the surplus of trade balance. The trade balance in January 2010 recorded USD461mn of deficit. We recently changed our forecast on the timing for an initial hike of the BOK policy rate from 1Q to 3Q of this year. A delay in rate hikes could weaken the KRW in 1H, with the current 2% policy rate maintained.
We now forecast annual average USD/KRW to rise 1,100 (previous 1,074) — We expect the USD/KRW could fall to 1,120 at the end of 1Q and 1,090 at the end of this year. We expect a weaker KRW to add more inflationary pressures by raising KRW-based import prices. Given the demand-pull inflation pressure we expect in 2H, the BOK would need to raise the policy rate aggressively to control inflation in 2H. We forecast BOK will raise the policy rate by 100bp during 2H of this year.