DOLLAR-WON: USDKRW edged lower this morning, to......>

DOLLAR-WON: USDKRW edged lower this morning, to 1066 at the time of writing,

continuing its gradual downtrend as the pair remains capped by the 50DMA.

Today's KRW strength has not been driven by interest rate spreads, after

adjusting for inflation expectations nor default risk, which have been moving in

the USD's favour.

- The Korean 2-year swap has edged lower, as the U.S. 2-year yield hit a new

cycle high. U.S.-Korea 2-year yield spreads have been moving in the USD's

favour. The narrowing of yield spreads was not driven by falling default risk in

Korea or falling breakeven inflation expectations.

- Following today's strength, the KRW is ~9% stronger than the levels justified

by default risk-adjusted real yield spreads, suggesting growing downside risk.

- With Korean default risk already close to all-time lows, there is little room

for further KRW gains on the back of increased risk appetite. Meanwhile, U.S.

2-year yields continue to show no signs of reversing, suggesting that higher

Korean rates will be needed for the KRW to continue rallying.